IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF MIAMI GENERAL EMPLOYEES':
AND SANITATION EMPLOYEES'
:
RETIREMENT TRUST, on behalf of :
itself and on behalf of all
:
others similarly situated,
:
:
Plaintiff,
:
:
vs.
:
:
C&J ENERGY SERVICES, INC.,
:
JOSHUA E. COMSTOCK, RANDALL C. :
MCMULLEN, DARREN M. FRIEDMAN,
:
ADRIANNA MA, MICHAEL ROEMER,
:
C. JAMES STEWART, III, H.H.
:
"TRIPP" WOMMACK, III, NABORS
:
INDUSTRIES LTD., and NABORS
:
RED LION LIMITED,
:
:
Defendants.
:
Civil Action
No. 9980-VCN
- - Chancery Courtroom #2
38 The Green
Dover, Delaware
Monday, November 24, 2014
2:00 p.m.
- - BEFORE:
HON. JOHN W. NOBLE, Vice Chancellor
- - -
PRELIMINARY INJUNCTION HEARING AND RULING OF THE COURT
- - -----------------------------------------------------CHANCERY COURT REPORTERS
410 Federal Street
Dover, Delaware 19901
(302) 739-3934
2
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APPEARANCES:
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3
4
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7
JAMES SABELLA, ESQ.
MARY THOMAS, ESQ.
JONATHAN KASS, ESQ.
Grant & Eisenhofer, P.A.
-andMARK LEBOVITCH, ESQ.
JEROEN van KWAWEGEN, ESQ.
KRISTIN MEISTER, ESQ.
of the New York Bar
Bernstein, Litowitz,Berger & Grossman LLP
for Plaintiff
8
9
10
11
12
13
14
15
STEPHEN C. NORMAN, ESQ.
JACLYN C. LEVY, ESQ.
Potter Anderson & Corroon LLP
-andMICHAEL C. HOLMES, ESQ.
ELIZABETH C. BRANDON, ESQ.
CRAIG ZIEMINSKI, ESQ.
of the Texas Bar
Vinson & Elkins LLP
for Defendants C&J Energy Services, Inc.,
Joshua Comstock, Randall McMullen, Darren
Friedman, Adrianna Ma, Michael Roemer,
C. James Stewart, III and
H.H. "Tripp" Wommack, III
16
17
18
19
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WILLIAM LAFFERTY, ESQ.
Morris, Nichols, Arsht & Tunnell LLP
-andALAN STONE, ESQ.
HAILEY DeKRAKER, ESQ.
CHARLES CONROY, ESQ.
of the New York Bar
Milbank, Tweed, Hadley & McCloy
for Defendants Nabors Industries, Ltd. and
Nabors Red Lion Limited
22
23
- - 24
CHANCERY COURT REPORTERS
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THE COURT:
2
preliminary injunction.
3
social hour first?
4
motion to compel.
5
Good afternoon.
We have a
Do we need to go through
Also, do we need to deal with the
MR. NORMAN:
Your Honor, I'd like to
6
do some introductions.
7
Elizabeth Brandon, Craig Zieminski from Vinson &
8
Elkins.
9
With me is Michael Holmes,
THE COURT:
10
Welcome.
MR. NORMAN:
With Your Honor's
11
permission, Mr. Holmes is going to make the argument
12
on behalf of the C&J defendants today.
13
14
THE COURT:
Thank you.
Mr. Lafferty is going to
introduce Mr. Stone.
15
MR. LAFFERTY:
It's my honor and
16
privilege, Your Honor, my former partner, now partner
17
in Milbank, Alan Stone, his colleagues Chuck Conroy
18
and Hailey DeKraker, also from Milbank.
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20
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23
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THE COURT:
Good afternoon, and
welcome.
MR. LAFFERTY:
Mr. Stone will speak on
behalf of the Nabors defendants, Your Honor.
MS. THOMAS:
morning, Your Honor.
My turn now.
Good
Mary Thomas from Grant &
CHANCERY COURT REPORTERS
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Eisenhofer on behalf of the plaintiff.
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colleagues --
3
4
THE COURT:
I have my
You can say it's morning
because that's how far I've gotten today.
5
MS. THOMAS:
It feels like it.
Good
6
afternoon.
7
Jonathan Kass and from the Bernstein Litowitz firm.
8
have Mark Lebovitch and Jeroen van Kwawegen, and
9
Mr. Kwawegen will be making the argument today with
10
I have my colleagues, Jim Sabella and
your permission, Your Honor.
11
THE COURT:
12
Mr. Holmes.
13
MR. HOLMES:
That's fine.
I was just going to
14
address the motion to compel.
15
suggest is I don't know that we have much past what's
16
in the briefing, and we can just take it up with the
17
argument of your motion.
18
19
MR. KWAWEGEN:
THE COURT:
That is what I was hoping
I would hear.
22
MR. HOLMES:
23
MR. KWAWEGEN:
24
I don't think we need
to address it right now.
20
21
What I was going to
Very well.
Good afternoon, Your
Honor.
CHANCERY COURT REPORTERS
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THE COURT:
Good afternoon.
2
MR. KWAWEGEN:
May it please the
3
Court, Jeroen van Kwawegen on behalf of the plaintiff
4
here.
5
Your Honor, the vast majority of
6
deals, litigated or not, have this patina of normalcy.
7
There are no real conflicts.
8
problems, and the Court sometimes sees those and moves
9
on.
10
11
THE COURT:
There's no real serious
Yet 90 some percent of
them draw litigation.
12
MR. KWAWEGEN:
That is correct, Your
13
Honor, and there is a serious problem there.
14
am urging on the Court is that this is not one of
15
those cases.
16
is a significantly different case from 97 percent of
17
the cases that Your Honor will even see.
18
What I
This case involves a broken process.
This is a case where the deliberative
19
process has been tainted by fiduciaries who have
20
conflicting interests and were pursuing their own
21
incentives, and this is a case among the lines of
22
Mills and Del Monte, Your Honor.
23
24
It
THE COURT:
Now --
You talk about conflict.
They're on the selling board, and they're going to end
CHANCERY COURT REPORTERS
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up on the new entity board.
Merely going from
2
director of one to director of the next can't be a
3
conflict.
4
entity, or is it because of the five-year guarantee?
Is it because they're directors in the new
5
MR. KWAWEGEN:
6
THE COURT:
Your Honor --
Or is it because they were
7
a majority?
8
majority when the deal goes through.
9
They're a majority now and they will be a
MR. KWAWEGEN:
Your Honor, the latter.
10
It is because right now they're on a non-staggered
11
board.
12
to a board where they will have guaranteed five-year
13
board memberships.
There are elections every year.
They will go
14
Now, Your Honor, by and of itself, you
15
will say, well, they are standing on both sides of the
16
transaction.
17
we're saying is this case is much more along the lines
18
of Mills where a majority of the board had an acute
19
interest in the future board membership and then took
20
a step back, did not actively oversee the process, and
21
that combined, the Court said, well, you cannot let
22
this stand.
23
24
That's not what we're saying.
What
So we're not urging on the Court to
make a ruling where just because you have a future
CHANCERY COURT REPORTERS
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board membership, well, now we have a conflict.
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at all, Your Honor.
3
fair to say that if you have an interest in guaranteed
4
five-year board memberships down the line, you cannot
5
take a step back and let the conflicted fiduciary of
6
this case, Mr. Comstock, go and run away and sell the
7
company from underneath you.
8
9
Not
But we think it is absolutely
Now, why was this such a broken
process?
Well, fundamentally, Your Honor, this board
10
did not even understand it was selling the company.
11
The board did not initiate a sales process.
12
not retain a financial advisor to assist with the sale
13
of the company.
14
potential bidder may want to pay for C&J.
15
It did
There's nothing to find out what a
Instead, all the documents,
16
contemporaneous documents, the minutes, the emails,
17
they all talk about the NCPS acquisition process.
18
addition to that -- so the board is not paying
19
attention to what's happening.
20
financial advisor, Citi, who was beholden to the CEO.
21
The CEO allows him to do both advisory work but also
22
to do the financing of the entire transaction,
23
generating $31 million in fees.
24
$31 million, $19 million is on the financing.
In
We also have a
And of that
CHANCERY COURT REPORTERS
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So Citi is not even retained by the
2
board, let alone looking out for the board's interest.
3
They're looking out for Mr. Comstock's interest.
4
What Mr. Comstock and management then
5
do, they say we'll bring in a second financial advisor
6
and see if they can give us a fairness opinion.
7
record is clear, Your Honor, and I'll show it to you,
8
that Tudor, this second financial advisor, never even
9
meets with the board until the day that they give the
10
The
financial opinion.
11
The fairness opinion.
That is not
12
consistent with the situation where the board is
13
actively overseeing a process involving the sale of
14
the company.
15
situation where they are looking to buy NCPS, but it's
16
not consistent where the board is taking its job
17
seriously in selling the company.
18
It is potentially consistent with the
In some ways, this case is worse than
19
Mills and Del Monte.
There, the board knew it was
20
selling the company.
It was running a sales process.
21
The deal presented to the board there would have
22
actually resulted in a premium, and I'll get back to
23
that later, Your Honor, but, here, it's a negative
24
premium deal.
And if the shareholders didn't like the
CHANCERY COURT REPORTERS
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deal, they could dissent and seek an appraisal.
2
Here, no such luck, Your Honor.
3
is no appraisal rights.
4
injunction hearing may be the last time that the
5
shareholders get a fair day in court.
6
There
So, in many ways, this
Now, there is some argument here or
7
there about the appropriate standard of review, so I
8
will briefly address that with Your Honor.
9
defendants admit that Nabors will have a majority
The
10
stake, 53 percent, in the combined entity.
11
says that Nabors will select a majority of the board
12
of this combined entity.
13
The S-4
Before this deal, no dispute, C&J did
14
not have a controlling stockholder, and stockholders
15
could replace the board members every year.
16
this deal, stockholders will be in the minority, and
17
in a Bermuda company with a single majority
18
shareholder, and they cannot, cannot, replace a single
19
director.
20
After
Defendants have not cited a single
21
case where, if you have that type of situation, it's
22
not a change of control and we're out of Revlon.
23
is clearly, at a minimum, a Revlon transaction.
24
This
Now, there's a lot of talk about what
CHANCERY COURT REPORTERS
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the by-laws do to protect supposedly the C&J
2
stockholders.
3
Your Honor's permission if the defendants go into this
4
with great detail.
5
I may get back to that in reply with
But here's what you really need to
6
know.
None of those provisions, none of them, require
7
Nabors to pay a control premium to C&J stockholders as
8
part of this deal that Your Honor is looking at right
9
now.
None of them give the C&J stockholders control
10
over the combined company.
11
directors.
They protect the C&J
They do not protect the C&J stockholders.
12
As the Supreme Court observed in QVC,
13
C&J stockholders will become "mere formalities."
14
is a Revlon deal, Your Honor, at a very, very minimum.
15
Now let's talk about the sales process
16
This
for C&J.
17
THE COURT:
Let's back up to that for
18
just a second.
19
just ordinary business judgment, would you lose?
20
If I were to conclude that this is
MR. KWAWEGEN:
No, Your Honor, I don't
21
believe so, because this deal is so fundamentally
22
broken that even under the business judgment rule, I
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think Your Honor would say, look, this is not
24
possible.
If that was the only thing, you might say,
CHANCERY COURT REPORTERS
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okay, well, maybe, maybe not.
2
But there's another issue here.
3
Stockholders are getting a negative premium deal.
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They're not being told that it's a negative premium.
5
They don't have appraisal rights.
6
we would then look at a disclosure injunction.
7
get back to this.
8
9
So, at a minimum,
I'll
Your Honor, you know that our firms
are not in the business of seeking disclosures or
10
bringing disclosure-type cases, but if there's a
11
fundamental disconnect between what the shareholders
12
are being told about the value of the shares that
13
they're selling and what they're actually getting,
14
that is, in and of itself, whether it's a business
15
judgment or not, that is a fundamental problem that
16
needs to be fixed.
17
So the sales process.
From the very
18
beginning to the very end, this board treated this
19
transaction as an acquisition of NCPS; not the sale of
20
C&J.
21
have them too, and I can put them on the screen.
22
your permission, I could approach and hand them to
23
you.
24
Your Honor, I prepared some handouts, and they
THE COURT:
That's fine.
CHANCERY COURT REPORTERS
With
12
1
MR. KWAWEGEN:
2
from exhibits that are already in the record.
3
These are just excerpts
The very first document, Your Honor,
4
on the left is just to show where it comes from.
5
These are the April 3rd, 2014 board minutes, and it's
6
not disputed that this is the first time that the
7
board is actually discussing this deal that we're
8
talking about here today.
9
Read what it says, Your Honor.
The
10
chairman, Mr. Comstock, "led a discussion of Project
11
Navy, a proposed acquisition of the completion
12
services division of a publicly traded oilfield
13
services company (Navy)."
14
There's no discussion here about
15
selling C&J, Your Honor.
16
minutes of the June 24th board meeting when they
17
actually approved this deal, Your Honor.
18
Then let's look at the
"Following the conclusion of the
19
executive sessions the Board requested that management
20
rejoin the meeting.
21
and upon motions duly made and seconded, the Board
22
unanimously approved the Company's acquisition of Navy
23
and each of the related items," blah, blah, blah.
24
Following additional discussion,
This is a board that is looking at
CHANCERY COURT REPORTERS
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buying a company, Your Honor.
2
looking at selling itself.
3
It's not a board that's
Mr. Comstock testified he did not
4
consider selling C&J to another company during the
5
past year.
6
5 at 19.
7
testified saying "we were not interested as far as a
8
board member in selling our business."
9
Mr. Stewart's deposition at 24.
That's Mr. Comstock's deposition, Exhibit
Mr. Stewart, one of the board members
10
That's
So the question rhetorically is how
11
can the defendants show that the process for the sale
12
of C&J was fair or reasonable when they did not treat
13
this deal as a sale of C&J?
14
is that they can't.
15
The answer, Your Honor,
As Vice Chancellor Laster also
16
explained in the Del Monte opinion, the board, in
17
order to satisfy at least its Revlon obligations,
18
needs to seek affirmatively the best possible deal,
19
reasonably possible deal that reasonably maximizes the
20
price for the shareholders.
21
nothing of that kind.
22
possible deal.
23
24
Here, the board did
They didn't seek the best
They were buying NCPS.
In the Netsmart decision, then Vice
Chancellor Strine still said that a breach of Revlon
CHANCERY COURT REPORTERS
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duties from the board failed to engage -- "engage in
2
any logical efforts to examine the universe of
3
strategic buyers and to identify a select group for
4
targeted sales overtures was a breach."
5
Here, the board did not run a sales
6
process, did not canvas the market, did not look for
7
an alternative bidder, did not retain independent
8
financials advisors to advise the board on the sale of
9
C&J, did not ask Citi or Tudor to find out how much a
10
potential alternative bidder for C&J would be willing
11
to pay for the company.
12
As Citi's fairness opinion says, "We
13
were not requested to and we did not undertake a
14
third-party solicitation process on C&J's behalf with
15
respect to the acquisition of all or a part of C&J."
16
The board did not take a direct and
17
active role in the sales process or actively oversee
18
Mr. Comstock while he was negotiating the deal.
19
Clearly, under Mills, QVC, Citron, the board had that
20
obligation, Your Honor.
21
THE COURT:
The scenario you describe
22
has some resemblance to what was happening in Plains.
23
Is Plains right?
24
Plains control the setting?
Is Plains distinguishable?
CHANCERY COURT REPORTERS
Does
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1
MR. KWAWEGEN:
Plains is
2
distinguishable, Your Honor, for a couple of reasons.
3
One, the board in Plains actually knew that they were
4
selling the company.
5
was a bidder that came along, a desperate buyer that
6
was offering a huge premium, and the board in that
7
situation determined deliberately, thinking about it,
8
determined that it was better to go with that bidder
9
than to pursue a stand-alone future of the company.
10
What happened there was there
There was a deliberative process.
11
Another reason why this case is
12
distinguished is that there was a huge premium, Your
13
Honor.
14
have in Plains is a board that reasonably tries to
15
maximize shareholder value, and reasonably concluded
16
that the best deal out there was this desperate buyer
17
that was willing to pay a huge premium.
Here, it's a negative premium.
18
So what you
Here, the board is not considering
19
selling C&J.
20
deal for NCPS which the board doesn't realize actually
21
involves a change of control, and they're losing the
22
company.
23
24
Instead, Mr. Comstock is negotiating a
It's a very different situation, Your Honor.
Now, after we put this record
together, we put in our briefs, suddenly Miss Ma sent
CHANCERY COURT REPORTERS
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1
in an affidavit and said, "Well, we considered all
2
options and everything was on the table."
3
are a couple of problems with that, Your Honor.
But there
4
First, it is important to know that
5
Mr. Comstock co-opted Miss Ma in this process early
6
on.
7
before the first board meeting, he told her, "Well, I
8
might retain you as a paid consultant, and I will talk
9
to the CEO of General Atlantic, your boss, about this,
10
11
When she was asking critical questions, even
make you look good."
Miss Ma was ultimately not retained,
12
but Mr. Comstock never withdrew that idea.
13
suddenly the emails drop.
14
And
The other problem with Miss Ma's
15
testimony and affidavit is that it flies in the face
16
of all the contemporaneous documents.
17
board minutes, none of the board minutes, talk about a
18
potential sale of C&J.
19
emails talk about the sale of C&J.
20
None of the
None of the contemporaneous
Mr. Comstock was clear in his
21
testimony "I did not consider selling C&J."
22
Mr. Stewart was clear in his testimony, "We as a board
23
were not considering selling C&J."
24
So, Your Honor, we respectfully submit
CHANCERY COURT REPORTERS
17
1
that this should be heavily discounted to the extent
2
that the defendants will actually rely on it.
3
Now, in addition to co-opting Miss Ma,
4
Mr. Comstock also co-opted Citi allowing it to provide
5
100 percent committed financing in addition to
6
providing these advisory services.
7
Now, as a result of this broken
8
process, we have no information about the value of C&J
9
to potential alternative bidders right now.
Well, the
10
defendants say, well, hasn't the company been for sale
11
since the announcement of this deal, isn't that like a
12
de facto type after-the-fact market check?
13
is no, Your Honor.
14
The answer
There are two problems with this.
15
First, under Delaware law, the stockholders were
16
entitled to a fair sales process run by an actively
17
engaged board.
18
harm, no foul, that's selling the C&J stockholders
19
short.
20
announced to anybody that the company was for sale.
21
So to sort of back into, well, no
But just as important, this board has never
THE COURT:
But we're talking about a
22
fairly small number of operations that would have the
23
interest and the wherewith all to buy C&J.
24
can't believe they all don't know about this
CHANCERY COURT REPORTERS
And I
18
1
transaction, and they all know how to jump a deal if
2
that's what they want to do.
3
MR. KWAWEGEN:
Your Honor, I think
4
there are two very important comments there.
5
don't think we know that it's only a relatively small
6
number of companies.
7
these companies actually know?
8
9
10
Nobody looked.
THE COURT:
First, I
Two, what do
There aren't that many
operations that have 2.1 or $2.6 billion.
That's a
starting filter in the process.
11
MR. KWAWEGEN:
Well, I acknowledge
12
that the oil price is dropping, but there's still
13
money to be made in the oil industry.
14
But here's what those other companies,
15
those theoretical potential bidders, do know.
16
they know, and what has been advertised to the world,
17
is that C&J is buying NCPS.
18
that C&J is being sold in the process and has ever
19
been in play.
20
What
It's not being advertised
What those other potential bidders
21
know is that a majority of the current board has been
22
guaranteed five-year board seats, untouchable, in a
23
Bermuda company.
24
are all these deal protections in place, including
What they also know is that there
CHANCERY COURT REPORTERS
19
1
unlimited matching rides for Nabors.
2
So if you put that altogether, it's
3
very rational for a theoretical potential alternative
4
bidder to say, well, how am I going to persuade a
5
majority of this board that is already locked into
6
five-year board memberships to now support a new deal
7
when the company has never, and the board has never,
8
even said that the company is up for sale, and even
9
maintains to this day that the company is not for
10
sale.
11
12
THE COURT:
Money probably would be a
very good solution for that conundrum.
13
MR. KWAWEGEN:
We think that there are
14
serious problems here as Your Honor probably gathers
15
from my presentation so far, and there are certainly
16
loyalty issues by a number of the people involved
17
here.
18
But there are two -- I see where Your
19
Honor is going.
There are two very fundamental
20
problems that we need to reckon with:
21
how much, after a process where the board has sold the
22
company without realizing it, now we're looking at
23
alternatives, and then hypothetically determining in
24
the future what the stock would have been sold for to
CHANCERY COURT REPORTERS
Figuring out
20
1
a theoretical potential bidder is, at best, an
2
imprecise exercise.
3
Secondly, just as importantly, there
4
are alternative equitable remedies available to Your
5
Honor to fix this process now.
6
go to money damages.
7
this.
8
have.
9
10
11
It's not necessary to
We have a possibility of fixing
Of course that's the requested relief that we
THE COURT:
Well, we're probably ahead
of ourselves, but what should be done?
MR. KWAWEGEN:
Your Honor, we believe
12
that there are multiple grounds for temporarily
13
enjoining this deal.
14
is the inadequate disclosure on the fundamental
15
pricing issues, and I'll get back to those.
16
One is the broken process.
One
And if Your Honor would temporarily
17
enjoin this deal, it would be, in some ways, analogous
18
to a disclosure injunction similar to what Vice
19
Chancellor Laster did in Del Monte.
20
deal should be enjoined, say, for 30 days, at least
21
before the December 31st cutoff so that Nabors cannot
22
walk away, and that there would be an adequate and a
23
real process run by the board members who are now, we
24
know, and they know, not going over to the new board.
We think that the
CHANCERY COURT REPORTERS
21
1
Because one of the things that the
2
defendants said in their papers was, well, how could
3
there be a conflict; these board members didn't even
4
know who was going to join this new board.
5
all know how that happens.
6
approved this deal, everybody knows a majority is
7
going over to this new board, right, but we don't know
8
who.
9
your chances of being on that board are very, very
10
Well, we
On June 24th, when they
If you're creating waves or you're voting no,
small.
11
Now, though, now we know who went
12
over.
13
who are not going over.
14
sales process, in compliance with their fiduciary
15
duties under Revlon, would be initiated and with their
16
own financial advisors and in good faith conducted,
17
that would go a long way, Your Honor.
18
don't have to second guess later what could have
19
happened, might have happened, should have happened.
20
We know that there are a number of directors
And we believe that if a
That way we
Now, I'll talk briefly about the NCPS
21
acquisition process because we don't only have a
22
problem here with the sales process with C&J.
23
also a fundamental issue with the way the acquisition
24
process of NCPS was conducted.
CHANCERY COURT REPORTERS
There's
22
1
Your Honor just saw the April 3rd
2
board meeting.
At that board meeting, as the minutes
3
reflect, the board gave authority to Mr. Comstock to
4
make a non-binding offer of $2.6 billion.
5
was made on April 4th.
6
30.
7
made clear all C&J board members will become members
8
of the combined entity, consistent with an
9
acquisition.
That offer
It's Exhibit 30, our exhibit
And it was based on 2014 EBITDA numbers, and it
10
When Nabors said no, Mr. Comstock went
11
back to the board with a proposal to increase the
12
offer to $2.75 billion.
13
email exchange on Exhibit 34, the board said, and
14
Mr. Friedman specifically said, okay, but let's not
15
get on a slippery slope on price here.
16
Mr. Friedman, I believe everybody concedes, is also a
17
financially savvy board member.
18
And as you will see in the
And
He said, "No, no slippery slope
19
please.
20
Comstock responded and he said, "Okay, I will make
21
clear to Nabors that I will await a formal response
22
and see what happens here."
23
24
You can go to 2.75 but that's it."
Mr.
Mr. Stewart testified that Comstack
did not have carte blanche and that the board expected
CHANCERY COURT REPORTERS
23
1
Mr. Comstock to come back before further increasing
2
the offer beyond 2.75.
3
at 38 and 39.
4
That's the Stewart deposition
"Question:
So you're saying the board
5
approved Mr. Comstock going back on a higher number
6
before he went back with the higher numbers?
7
"Answer:
No.
We went, we approved
8
his wanting to raise the offer price from 2.6 to 2.75
9
and that was his max target at that time.
And he had
10
come back to us and tell us how it goes.
11
says that.
12
and we'll do it but it was not carte blanche."
13
I think it
I know -- I, you know, keep us informed
On April 16th, Mr. Comstock sends his
14
$2.7 billion letter, and as part of the governance
15
requirements of that offer for NCPS, he included the
16
idea of a dual class structure.
17
quickly shot that down.
18
dual class structure."
19
Mr. Petrello, Nabors,
He said "I'm not doing this
Now, after this exchange, and after
20
having received a number of probing emails, Mr.
21
Comstock lamented the board oversight to Mr. Trauber
22
of Citi, and Mr. Trauber said, "Well, you have to get
23
the board out of the day-to-day."
24
This is Plaintiff's Exhibit 35, and
CHANCERY COURT REPORTERS
24
1
it's also blown up on your screen and in the binder in
2
front of you.
3
April 15, "It's going to happen.
4
need to get the board out of the day-to-day.
5
done deals for 26 years, hundreds, and never seen a
6
CEO have to provide their board so much data
7
day-to-day and have to constantly answer emails from
8
the board.
9
meeting, you should seek permission approval to
Mr. Trauber says to Mr. Comstock on
One issue is you
I have
As you attempted to do in the first board
10
negotiate the best deal you can for your shareholders
11
and then present to them for approval or disapproval.
12
That will save you some years on your life."
13
Again, Your Honor, Mr. Comstock never
14
got blanket approval as he later claimed to just
15
negotiate a deal.
16
It was not in the cards.
Now, on April 22nd, Mr. Comstock
17
learned that NCPS had a very bad first quarter in
18
2014, especially in the completion segment of the
19
business.
20
Exhibit 36, "There's no way he," and he meant
21
Mr. Petrillo, "turns it around from minus 6 million to
22
60 million in one quarter.
23
and Q4 which won't happen."
24
He wrote to Mr. Trauber, and this is
So that means more in Q3
And a little later, he goes on, "I
CHANCERY COURT REPORTERS
25
1
can't believe they didn't disclose this to us.
2
me look foolish.
3
this."
4
Made
I could have prepped people for
There's no evidence whatsoever that
5
Mr. Comstock then went to the board.
6
Mr. Trauber had suggested to get the board out of the
7
day-to-day, there is a remarkable drop in emails.
8
9
After
Three days later, April 25, Mr.
Comstock sends a letter increasing C&J's offer to 2.9
10
billion.
11
make the numbers in Q1 and that Q2 and Q3 are going to
12
be bad too.
13
He's just learned that they're not going to
And he increases it the 2.9 billion.
He also uses now a different basis for
14
valuing the business because he knows that the 2014
15
EBITDA will no longer support this increase.
16
no more dual class structure, and there's no evidence
17
whatsoever, Your Honor, that the board gave approval
18
to Mr. Comstock to make this increased offer.
There's
19
In fact, Mr. Comstock testified that
20
the board never formally -- "never formally approved
21
any of these letters."
That's his deposition on five.
22
Now, Mr. Comstock and Miss Ma later
23
try to fix this by saying that Comstack had blanket
24
approval to get to a deal, and then they will just do
CHANCERY COURT REPORTERS
26
1
due diligence after and see how it goes.
But this
2
assertion is not right, Your Honor.
3
the April 3 board minutes saying you have approval for
4
a $2.6 billion offer, the April 14 email exchange with
5
the board where Mr. Friedman said not to get on a
6
slippery slope on price, the April 15 email from
7
Trauber saying to Mr. Comstock, "You should try to get
8
blanket approval," and Mr. Stewart's testimony that
9
2.75 billion was Comstock's "max target" at the time,
It's refuted by
10
and that Mr. Comstock did not have carte blanche to
11
make a higher offer.
12
Now, Mr. Comstock did not tell the
13
board about this April 25 offer of $2.9 billion.
14
you look at the April 29, 2014 board minutes and the
15
meeting packet, it's clear the board did not get a
16
copy of the April 25 letter.
17
materials.
18
offer.
19
the board giving approval to enter into a $2.9 billion
20
agreement.
21
If
It's not in the
The minutes do not mention the 2.9 billion
Not discussed.
And the minutes do not mention
Nothing of the kind, Your Honor.
Now, the evening of April 29th, they
22
just had the board meeting.
Mr. Comstock has a
23
telephone conversation with Mr. Petrello.
24
time, the board is unaware of the $2.9 billion offer.
CHANCERY COURT REPORTERS
At this
27
1
And Mr. Petrello knows exactly what levers to push to
2
get to an agreement.
3
Nabors will push "aggressive employment agreements"
4
for the C&J executive management.
5
It's a text message.
6
He tells Mr. Comstock that
That's Exhibit 10.
In that same telephone conversation,
7
Mr. Comstock and Mr. Petrello agree on a
8
$2.925 billion agreement in principle.
9
S-4.
10
That's in the
Now, Mr. Comstock understands this
11
business.
12
be supported by the 2014 EBITDA.
13
performing well."
14
Mr. Petrillo an email.
15
the road to a deal.
16
update your forecast for 2015 EBITDA because this will
17
help 'the valuation case'."
18
He says, "I understand this is not going to
I see this is not
So on May 2nd, he sends
Now they're joint ventures on
And he says on May 2nd, "Please
That's Exhibit 39.
After Mr. Comstock enters into this
19
agreement without any board approval, he goes to Citi
20
and he says, "Mr. Trauber, I'm hereby giving you
21
approval to also provide the financing for this deal."
22
Citi now will get $31 million in fees if this deal
23
closes.
24
Although Tudor was then brought in on
CHANCERY COURT REPORTERS
28
1
May 23rd, 2014 to cleanse this supposed conflict, this
2
conflict, the record is clear that Tudor never met,
3
ever met with the board until June 23rd and June 24th,
4
and the board minutes of both June 23rd and June 24th
5
make clear that Tudor had no role whatsoever in the
6
negotiations of this deal.
7
Tudor were very clear during this meeting, "We had no
8
role in this.
9
The representatives of
This is just Citi and Mr. Comstock."
Now, what happens after that, after
10
Mr. Comstock has made his $2.925 billion agreement in
11
principle with Mr. Petrillo?
12
One of the fundamental issues and
13
points that I really want to make sure that I bring
14
across is that NCPS is a division of Nabors.
It has
15
no publicly verifiable financial statements.
It is a
16
division.
17
to value this business, that you have verifiable
18
information about the actual performance of the
19
company.
20
So it is critically important, if you want
So C&J retained Deloitte, and Deloitte
21
was retained to do two things.
Deloitte was retained
22
to give tax advice because there are tax implications
23
in this deal, but Deloitte was also retained to do
24
financial and accounting due diligence.
CHANCERY COURT REPORTERS
29
1
On June 10th, 2014, Deloitte sent an
2
email identifying a list of key issues, and I have
3
this also.
4
they changed the methodology.
5
email from Deloitte.
6
This is the April 25th letter showing that
This is the June 10th
And Deloitte says on June 10th, one of
7
the key items, number three, is "April 2014 forecasts
8
are low in the forecasts continuing the downward trend
9
in profitability in full year '14 from full year '12
10
to full year '13.
This is something to consider for
11
deal value as the step change in the company's
12
profitability may be more severe than management's
13
forecast.
14
"Also, our comparison of year over
15
year results for full year '14 appears to indicate
16
that much of the decline is due to climate changes and
17
not just weather as discussed in public statements for
18
Q1.
19
in Texas which should not have been impacted by
20
weather over the same period over the prior year."
21
We noted the biggest year over year declines were
And I asked Mr. Comstock about this,
22
and he says, oh, yes, we knew that the significant
23
drop was largely due to the loss of a major
24
take-or-pay contract that NCPS had with Marathon.
CHANCERY COURT REPORTERS
30
1
That's at page 132 of his deposition.
2
I just want to show Your Honor how big
3
of an impact that is.
4
binder, I don't have it on the screen, we have an
5
excerpt from a March 5th, 2014 presentation from
6
Nabors management to C&J management, and page 20 of
7
this presentation shows on the left-hand side the
8
Marathon contract and then the other contracts, and
9
those are the top ten customers in south Texas in
10
2013.
11
contract.
If you go to Tab 6 of your
It is a massive impact to lose this Marathon
12
Now, Your Honor, the record is clear,
13
no one informs the board about these findings, about
14
the June 10th findings.
15
deposition at page 130 and 131, and he says, "No, we
16
did not tell the board."
17
Mr. Comstock testified in his
Mr. Comstock further testified that
18
around June 11th, after this became known, less than
19
two weeks before the board approves the deal, his best
20
estimate of 2015 EBITDA for NCPS is only 380 to
21
400 million.
22
no one informs the board.
23
24
That's at 136 of his deposition.
Again,
A few days later, Nabors put out the
May results and gives a June forecast, but by that
CHANCERY COURT REPORTERS
31
1
time, the record is clear, the emails are clear, Mr.
2
Comstock's testimony is clear, that Mr. Comstock did
3
not believe Nabors' forecasts any more.
4
between June 12th and June 14 that the forecasts for
5
NCPS were no longer credible and that Nabors was
6
engaging in creative accounting, showing funny math.
7
He said
Now, when confronted with this, Mr.
8
Comstock and Miss Ma said, well, what was really going
9
on here was it was an accounting issue, you see,
10
because Nabors is a driller largely, and they have
11
this NCPS completion and production services unit in
12
there, and the accounting just didn't match up.
13
was an Oracle issue, software.
14
It
And if that was true, Your Honor, why
15
then, two days later, tell Deloitte to stop working on
16
the accounting due diligence as they do?
17
McMullen tells Deloitte "Stop your financial
18
accounting due diligence."
19
Exhibit 47.
20
June 16th,
That's the Defendants
Two days later, June 18th, six days
21
before the board approves the deal, Citi does a
22
presentation to C&J management, and I believe I have
23
it here, and that's Tab 7 of your binder, Your Honor.
24
Here's what they say.
CHANCERY COURT REPORTERS
It's again an
32
1
excerpt of this presentation, and the first page is
2
"Project Navy Discussion Materials" dated June 18,
3
2014, and the next page is "Diligence/Forecast
4
Considerations," June 18th.
5
Citi says to C&J management, well,
6
"Diligence identified several areas that imply
7
significantly lower results for 2014 and 2015.
8
rate performance is significantly lower than
9
previously suggested.
Run
May run-rate plus Canada
10
equates to approximately $369 MM of annual EBITDA,"
11
way below the earlier forecasts clearly.
12
Then they talk about the April results
13
that were significantly lower than forecasted.
14
they talk about the additional services that Navy's
15
corporate division currently provides and that will
16
need to be factored in.
17
into account, Citi says, 2015 EBITDA for NCPS best
18
estimate is 408 million.
19
20
Then
And taking all those factors
Mr. Tisman testified at that time that
was the number that we were most comfortable with.
21
The next day, five days before they
22
approved the deal, Mr. Comstock signals to
23
Mr. Petrello, "I will increase the multiple to get a
24
deal."
CHANCERY COURT REPORTERS
33
1
I put the email on your screen, Your
2
Honor, and it's also Tab 8 of the binder.
3
Mr. Comstock says on June 19th, to Mr. Petrello only.
4
"Once I get the feedback from Randy," Mr. McMullen,
5
"on where we are off on forecasts I will call you to
6
discuss valuation.
7
valuation of the $2.295 was based on 6x 2015 ebitda or
8
$490," clearly a reference, Your Honor, to the
9
agreement in principle of the 2.25 billion.
10
Here's what
My current thinking is original
Mr. Comstock continues, "To the extent
11
forecasts come down, I'm willing to stretch to a 6.5x
12
to get it done.
13
it is a blended multiple of the peer group plus 1
14
term.
15
current forecast and it's a mute point.
16
the meeting last night."
17
6.5 is a number I can substantiate as
Hopefully, everyone gets comfortable with the
Thanks for
This is not an innocent email, Your
18
Honor.
This is a very, very important email.
Mr.
19
Comstock knows the forecasts are coming down.
20
knows that the best estimate of Citi and Mr. Comstock
21
himself is only $408 million.
22
times multiple to that, you clearly get to a
23
$2.4 billion deal, not $2.925 billion deal.
24
that if there's a deal to be done, he needs to do
He
If you apply a six
CHANCERY COURT REPORTERS
He knows
34
1
something, and this is his answer.
2
stretch the multiple to the extent the forecasts come
3
down to 6.5, one turn over the peer group multiple.
4
Again, very clear, Your Honor, that no one informs the
5
board.
6
He is willing to
Mr. Comstock, in his deposition at
7
168, "Question:
8
that to the extent the NCPS EBITDA forecasts for 2015
9
would come down, you were willing to increase the
10
Did you inform the board in June 2014
multiple to six and a half to get the deal done?
11
"Answer:
No."
12
Now, if you just take this six and a
13
half multiple and you take the 2.925 agreement in
14
principle that Mr. Comstock had entered into, 2.925
15
divided by 6.5, you get to $450 million target.
16
That's exactly what the email above on your screen in
17
Exhibit 56 says.
18
Nabors immediately understands that if
19
they want to get a deal at 2.925, the EBITDA forecast
20
for NCPS needs to come in at around 450.
21
take them long to figure that out.
22
Your Honor, will see the same is true on the side of
23
C&J.
24
number.
It doesn't
And Exhibit 59,
Now both sides are looking at 450 as a magical
CHANCERY COURT REPORTERS
35
1
At that point in time, Nabors had
2
said, well, our forecast is $515 million in EBITDA,
3
and C&J said, well, our best estimate is 408.
4
sides now know, okay, we need to get to this 450
5
number to get the deal done in the range that we had
6
previously agreed.
7
Both
They don't reengage Deloitte at all.
8
They don't tell the board about these issues.
9
They sit in a room, and they work it out, and lo and
10
No.
behold, they get to a $445 million forecast.
11
Your Honor, there has been some back
12
and forth about where this $445 million is the upside
13
case.
14
saying this is an upside case.
15
believed it was an upside case.
16
affidavit saying that he believes he's now being
17
misunderstood, but the truth is, Your Honor,
18
defendants have submitted no evidence whatsoever that
19
$445 million would ever be a best estimate; not in Mr.
20
Comstock's affidavit retracting his earlier testimony.
21
It's clear in the contemporaneous documents
Mr. Comstock said he
He later submitted an
Instead, what the defendants are
22
saying is, well, this was a reasonable process leading
23
to a reasonable price.
24
Then they cite Plains that we briefly
CHANCERY COURT REPORTERS
36
1
discussed, and OPENLANE and Smurfit.
2
cases, Your Honor, the majority of the board was
3
disinterested.
4
understood it was selling the company and actively
5
oversaw the process.
6
Not so here.
In each of those
In each case, the board
We talked about Plains, but in
7
OPENLANE, there was a finding that the board was
8
"fully committed to the process" and performed a
9
"targeted market check."
In Smurfit, there was a
10
special committee that oversaw the day-to-day of the
11
negotiations.
12
advisors.
13
get a significant premium.
They had their own financial and legal
And in each case, the shareholders would
14
Not so here.
So let me briefly talk about the
15
premium here.
16
NCPS is not a public company, so the stockholders here
17
have to rely on the representations in the S-4 about
18
the forecasted EBITDA and performance that formed the
19
basis of the valuation.
20
independently check.
21
don't know, don't know that this is a negative premium
22
deal.
23
24
As I mentioned earlier, Your Honor,
They cannot go out and
And, here, the stockholders
It's nowhere announced.
The June 24 presentations from Citi
and Tudor, the fairness presentations that were given
CHANCERY COURT REPORTERS
37
1
to the board on June 24th, they used a $445 million
2
EBITDA forecast.
3
okay, well, the implied price per share that
4
stockholders will get in this deal is $30.76 is a
5
share.
6
trading price then of $32.50 a share.
7
also note that the implied price per share in this
8
deal is below the implied price per share of C&J on a
9
stand-alone basis.
Based on that forecast, they said,
They also mention that this is below the
10
Citi and Tudor
When you look at the DCF analysis of
11
Tudor, and you look at the DCF analysis of Citi, they
12
provide a range, but the midpoint of those ranges are
13
between $35 a share and 37 and change a share for
14
Tudor and Citi.
15
price per share that is below the trading price and
16
below the stand-alone price.
17
So what we have here is an implied
So even using a stretched six and a
18
half multiple and what we believe to be an unrealistic
19
$445 million EBITDA forecast, because it was backed
20
into in order to get a deal done, you still have a
21
negative premium deal.
22
Mr. Stewart testified, and this is
23
consistent with the board that is actually trying to
24
buy a company, not sell itself, Mr. Stewart testified
CHANCERY COURT REPORTERS
38
1
the board didn't even discuss the issue of a control
2
premium.
3
At page 58, "Question:
In this
4
transaction, did any director ever raise the point
5
that since Nabors was getting more than 50 percent of
6
the stock the C&J shareholders should get a change in
7
control premium?
8
9
10
"Answer:
I am not aware of -- about
the suggestion of change of form premium being
discussed, no."
11
Now, after the record is created and
12
the briefs are submitted, Miss Ma suddenly says, well,
13
there was a discussion about a control premium.
14
when I asked about this discussion, she referenced
15
potential synergies in the future.
16
there was going to be revenue synergies, there's going
17
to be cost synergies, there's going to be tax
18
synergies.
19
premium over the then current trading stock price
20
based on the stand-alone value of C&J.
21
But
She said well,
But she didn't say anything about a
Now, these synergies are just
22
potential future savings, potential future revenue
23
increases for a "pro forma" company that relies on the
24
projections of Mr. Comstock and his managers.
CHANCERY COURT REPORTERS
There
39
1
is no evidence that any of them are real.
2
fundamentally, the payment of a premium on the value
3
of your share on the date of the transaction for
4
selling your control, that premium is, of course, very
5
different from getting a potential upside in the
6
future that may or may not be realized depending on
7
the market conditions and assumptions that are made.
8
9
And more
That is not a control premium.
I do
not get more for my shares in return for giving up
10
control.
11
C&J stockholders are supposedly getting a control
12
premium because of these potential synergies, while
13
they get a minority interest, and a minority interest
14
in the company, and a minority interest in those
15
future synergies, what is Nabors getting; a super
16
control premium?
17
those synergies, Your Honor, they will get 53 percent
18
of those future synergies.
19
doesn't make sense.
20
I just share in the future upside.
So if
Because they get the majority of
This is not -- this
The other thing that the defendants
21
ignore is that synergies don't magically appear.
22
There are integration costs that you need to take into
23
account.
24
clear that even with the synergies, this is a negative
When those are taken into account, it's
CHANCERY COURT REPORTERS
40
1
premium deal at closing.
2
defendants Exhibit 31, and I have it here, it's at Tab
3
9, this is a Citi's synergies presentation on
4
June 23rd, Your Honor.
5
If you look at the
If you look, Your Honor, this is an
6
excerpt on the right.
It says at the top "Potential
7
Synergies and Integration Costs Forecast," and at the
8
right, it says "Net Synergies Profile."
9
the left starts negative, and it's difficult to see
That box on
10
with the copy, but it's negative 62 million.
There
11
are no synergies, even under Citi's analysis, until
12
2015.
13
close of this deal.
There's no payment of a control premium at the
14
Now, the defendants try to cure this
15
negative premium by bringing an expert and they say,
16
well, I will retroactively find that this was a fair
17
deal.
18
the appraisals analysis where our stockholders don't
19
get them.
That's ironic, Your Honor, because he's doing
20
And there's more problems with that.
21
Mr. Beaulne's report clearly states that what he did
22
here is he took the 515 million forecast from Nabors
23
and then tried to assess whether it was reasonable for
24
management to back into the $445 million.
CHANCERY COURT REPORTERS
41
1
Now, Mr. Beaulne, unlike C&J
2
management probably, but Mr. Beaulne knew and relied
3
on KPMG reports that were prepared for Nabors
4
management.
5
told KPMG at the end of April that their best estimate
6
for 2015 EBITDA for NCPS was 387 million; not
7
515 million.
And in those reports, Nabors management
8
9
Now, maybe Nabors used that 515
million as negotiation strategy.
I don't know.
What
10
I do know is that KPMG was told it's 387.
Mr. Beaulne
11
referenced those reports in his report.
12
about the 387.
13
determine whether retroactively this is magically a
14
fair deal?
He knows
How does he take them into account to
He doesn't, Your Honor.
15
When I asked him he said, well, no,
16
no, this is a draft report.
And I show him the final
17
report still using the 387, and Mr. Beaulne had no
18
answer.
He did not take that into account.
19
Instead, he took the unsupported
20
estimate of 515 million at face value and then
21
concluded that backing into the 445 million was
22
somehow fair.
23
Now, Mr. Beaulne's estimate, just like
24
the other arguments from the defendants, that includes
CHANCERY COURT REPORTERS
42
1
the synergies, which we believe is not a control
2
premium.
3
a billion dollars that Mr. Beaulne projects won't be
4
realized until after 2018.
5
model shows that if you use C&J's actual beta, not a
6
manufactured average, an actual beta, then C&J's
7
value, according to Mr. Beaulne, all else being equal,
8
increases by $400 million and exceeds the value of
9
NCPS, again, all else being equal, by $300 million.
10
The vast majority of those synergies, almost
And then Mr. Beaulne's own
This is a negative premium deal, Your
11
Honor.
12
books cited in Mr. Beaulne's report cited by --
13
written by someone else at Duff & Phelps says when it
14
is an openly traded security, you use the actual beta;
15
you don't use an industry average.
16
Beaulne chose to use an industry average.
17
This is a negative premium deal.
One of the
Instead, Mr.
Your Honor, this is a negative premium
18
deal where stockholders are not informed.
19
negative premium deal.
20
and the deal is the result of a deeply broken process.
21
It is a
They have no appraisal rights,
C&J stockholders were entitled to a
22
process where the board would implement a reasonable
23
process, provide active oversight over management as
24
the board sought out the reasonable available maximum
CHANCERY COURT REPORTERS
43
1
price.
2
They got the opposite.
The board did not know it was selling
3
C&J, did not implement a reasonable sales process,
4
never informed anyone that the company was for sale,
5
did not include a go-shop, did not get a control
6
premium.
7
Without an injunction, C&J
8
stockholders will be locked into a minority stake in a
9
Bermuda company, will lose their vote, cannot get rid
10
of any directors and will have no ability -- no
11
control over who will run this company.
12
13
14
THE COURT:
Why should I get in the
way of the shareholders making their own decision?
MR. KWAWEGEN:
Your Honor, if the
15
shareholders were told that this was a negative
16
premium deal where the stand-alone value according to
17
Citi and Tudor exceeded the implied value per share by
18
at least $5 a share, if the shareholders were told
19
that this was a process where the C&J board sold the
20
company without even realizing it, if the C&J
21
shareholders were told that Mr. Comstock was
22
negotiating secretly with Mr. Petrello to get to a
23
$2.925 billion deal and then stretched the multiple to
24
get a deal done, maybe Your Honor, but those
CHANCERY COURT REPORTERS
44
1
disclosures were never made.
2
The C&J stockholders don't know this.
3
And then the people who vote against this, if this
4
goes to a vote, they don't have any remedies.
5
can't go and get an appraisal because there are no
6
appraisal rights in this deal either.
7
because Mr. Comstock's stake is locked up, that could
8
be a majority.
9
THE COURT:
They
Your Honor,
I understand your argument
10
that Mr. Comstock has committed to vote his shares,
11
but given how bad you say the deal is, and he has
12
special benefits, that also tells me that from Mr.
13
Comstock's position, it's a very good-looking deal.
14
He's going to vote for it whether his shares are
15
locked up or not.
16
Isn't that a reasonable assumption?
17
In other words, I'm not sure the deal locking up Mr.
18
Comstock really adds much to the mix in terms of what
19
the votes are going to be.
20
MR. KWAWEGEN:
Your Honor, I think
21
that's a fair comment.
I don't know how Mr. Comstock
22
is going to vote.
23
told that he is going to vote in favor of the deal,
24
and they're not told about his private benefits, and
I know that the shareholders are
CHANCERY COURT REPORTERS
45
1
that, in and of itself, may misinform the shareholders
2
here.
3
My real point here is that a majority
4
of the stockholders may vote against this deal, will
5
have no appraisal rights, and they'll be locked into a
6
company that is located in Bermuda to get a negative
7
premium on their stock, and they're going to be
8
harmed, irreparably harmed.
9
Now, Your Honor, obviously this case
10
is not about admissions in the proxy.
I mean, there
11
are fundamental issues here.
12
But, also, there are misrepresentations in the proxy
13
itself.
14
of NCPS's 2015 EBITDA, and they say 516.
15
told KPMG it's 387, just to give you one example.
16
still talks about the 445 as if that's a real
17
estimate.
It's a broken process.
For example, it still lists Nabors' forecast
KPMG -- they
It
18
Your Honor, the stockholders -- it's
19
not a case where a banker had an additional piece of
20
information that he could have included in his DCF.
21
This is way beyond that.
22
problem.
23
24
THE COURT:
This is a significant
Do we have disclosure
claims properly before the Court?
Because when I read
CHANCERY COURT REPORTERS
46
1
the conclusion in plaintiff's opening brief, it's
2
talking about enjoining the shareholder vote and the
3
enforcement of the deal protection provisions to allow
4
C&J's board to appropriately explore reasonable
5
alternative transactions.
6
disclosure claim to me.
7
Doesn't sound like a
MR. KWAWEGEN:
Well, Your Honor, the
8
truth is -- there are two answers to that.
9
answer, it's clearly in our complaint.
The first
We say unless
10
there is an equitable remedy here, the stockholders
11
will never get adequate disclosures about this deal.
12
I believe that's paragraph 182 of the complaint.
13
But then the other point is that when
14
you take a step back and you look at this deal -- I
15
gave you a few examples of the disclosures that I
16
would have in mind.
17
proxy, Your Honor.
18
different deal than what is being presented to
19
shareholders.
20
They would have to rewrite the
I mean, this is a fundamentally
This proxy doesn't even disclose that
21
the C&J stockholders are selling control.
22
So it's not just like a situation, like I said
23
earlier, where a bank was provided with a DCF piece
24
that they could have run or not run.
CHANCERY COURT REPORTERS
It doesn't.
This proxy has
47
1
no resemblance to what this deal is.
2
And our significant concern is that
3
that is a result of lack of board oversight, majority
4
of the board having interest and letting Mr. Comstock
5
run wild.
6
Now, without an injunction, C&J will
7
never get the benefit of an informed, deliberative
8
board process which I believe they are entitled to
9
under Delaware law.
They will also never get the
10
opportunity for a pre-vote topping bid because the
11
company is still officially not for sale.
12
As I think I alluded to earlier, money
13
damages are very difficult here, Your Honor.
14
hypothetical world what they could have gotten, should
15
have gotten, is very difficult, and we get, of course,
16
the Del Monte.
17
In a
One big thing, of course, is that
18
there is no competing bidder right now, and I
19
understand that that is one of the things that may be
20
on the Court's mind and the defendants will point to.
21
22
23
24
THE COURT:
I'm sure if it's not on my
mind, it will be pointed out to me.
MR. KWAWEGEN:
And I understand why
Delaware courts would be hesitant, when there is a
CHANCERY COURT REPORTERS
48
1
competing bidder, to sort of interfere with that, or
2
why Delaware courts would be hesitant to interfere
3
with the premium on the table like, for example, in
4
Plains.
5
enjoin this deal and risk the shareholders having that
6
premium, miss out on that premium?
There's a massive premium.
7
Those are perfectly legitimate and
8
fair concerns.
9
It's a negative premium deal.
10
Here, there is no premium, Your Honor.
It's not the same
situation as in these cases.
11
12
Am I going to
As I said earlier, the stockholders
don't even know it's a negative premium deal.
13
Balance of the equities.
Your Honor,
14
then Chancellor Strine laid out four factors in the
15
Ace case.
16
it meets each than every one of them.
17
broken process where the shareholders are not being
18
fairly informed and will not get fair value and not
19
have the benefit of a fair process.
20
I won't go through them, but in this case,
We have a
The only issue that I think
21
legitimately could be raised is, well, what about the
22
expectancy of Nabors; don't they have an expectation
23
in the deal protections; didn't they negotiate for
24
them; shouldn't they get the benefits from them.
CHANCERY COURT REPORTERS
49
1
And the answer from our perspective is
2
no, Your Honor, no.
3
absence of the go-shop, the go-shop provision,
4
matching rights, termination fee, are all the result
5
of the fiduciary breaches of the board and Mr.
6
Comstock that cannot be readily addressed after trial.
7
And Nabors got those deal protection measures by
8
aiding and abetting Mr. Comstock in improperly
9
informing the board and breaching his duties.
10
Those deal protections, the
This was a song and dance between
11
Mr. Petrello and Mr. Comstock starting with the
12
agreement in principle of $2.925 billion on April 29th
13
that Mr. Comstock had no authority to enter into.
14
Mr. Petrello enticed Mr. Comstock to
15
enter into this agreement in principle by promising
16
aggressive employment agreements.
17
together with Mr. Comstock to back into the
18
$445 million EBITDA forecast that it knew -- that it
19
felt was false because it reported 387 to KPMG, and it
20
took Mr. Comstock's cue when he said "I will stretch
21
the multiple to get this done."
22
the benefit from the misconduct in which itself has
23
participated.
24
Nabors then worked
Nabors should not get
Your Honor, unless you have any
CHANCERY COURT REPORTERS
50
1
questions, I will reserve the right to rebut.
2
3
THE COURT:
you.
4
Mr. Holmes.
5
MR. HOLMES:
6
THE COURT:
7
I do not right now, thank
Yes, sir.
We will probably go about
20 minutes and then take a break.
8
MR. HOLMES:
Okay.
9
MR. NORMAN:
Your Honor, we have a
10
couple sets of binders.
May I approach?
11
THE COURT:
12
MR. HOLMES:
13
Honor.
14
15
You may.
Good afternoon, Your
It's a pleasure to be back in Dover.
THE COURT:
You have spent time here
before.
16
MR. HOLMES:
I have.
17
first time in this courtroom.
18
that this is much wider.
19
THE COURT:
20
you're going to see.
21
with it?
22
This is the
I already like the fact
That's as good a podium as
Have you figured out how to play
You can raise it and lower it.
MR. HOLMES:
We have a diametrically
23
opposed view of the record here.
We think this was a
24
board that was fully involved in the process, more
CHANCERY COURT REPORTERS
51
1
involved in the process than I am used to seeing a
2
board; that, in my view, had in many respects, what
3
you'll see in cases impeccable knowledge of the
4
market, of the players, of what the possibilities
5
were.
6
reasonably the entire time.
And this was a fully informed board that acted
7
I'm going to get into the entire
8
process and talk about -- give the Court a fuller
9
picture, in my view, of what happened from the
10
beginning to the end.
11
request can really be denied for a very simple reason,
12
and one of the things that Your Honor hit on is what
13
their request actually is.
14
But the plaintiff's injunction
In both -- in their motion, their
15
conclusion is exactly as the Court read.
16
should enjoin the shareholder vote on the merger and
17
the enforcement of the deal protection mechanisms or
18
deal protection provisions to allow C&J's board to
19
appropriately explore reasonable alternative
20
transactions.
21
The Court
In our response brief, we point out,
22
well, they don't bring any disclosure claims.
23
not saying that the shareholders aren't fully
24
informed.
They're
They aren't saying there's any reason why
CHANCERY COURT REPORTERS
52
1
this Court should interfere with stockholder
2
democracy.
3
the conclusion is exactly the same.
4
enjoin the shareholder vote on the merger and the
5
enforcement of the deal protection provisions to allow
6
C&J's board to appropriately explore reasonable
7
alternative transactions.
And in their reply, they come back, and
8
9
The Court should
Today, to come in and say emphatically
I think that the proxy now, in their view, contains
10
misrepresentations is very troubling.
11
Delaware law is very clear; if it's not in your motion
12
for a preliminary injunction, it's been waived.
13
Emerald Partners.
I think
It is settled
14
Delaware law that a party waives an argument by not
15
including it in its brief.
16
prayer.
17
in between.
18
it.
It's not in the first
It's not in the last prayer, and we raised it
So to raise it today, they have waived
19
Now, with respect to the very simple
20
reason why it can't be enjoined, the other thing you
21
don't see in their first brief is any challenge to the
22
very deal protection mechanisms that they want the
23
Court to enjoin.
24
We point that out in our response.
And the reason you don't see a
CHANCERY COURT REPORTERS
53
1
challenge to the deal protection mechanisms is because
2
they are, at worst, down the middle of the fairway
3
from the deal protection mechanisms this Court and
4
Your Honor has enforced time and time again in other
5
deals, including in the Plains deal.
6
We have a no-shop with a fiduciary
7
out.
The one interesting thing about the fiduciary
8
out here which actually makes it more favorable to C&J
9
is the fact that it doesn't have to be a superior
10
proposal for the entire company.
11
of the company.
It can be for part
12
You have match rights.
13
a termination fee that is round about three percent of
14
equity value which has been enforced and found
15
reasonable time and time again.
16
this out in our response brief.
17
You also have
And we again point
And in their reply, they devote about
18
a third of a page to saying, without specifically
19
going into any of them -- and I note today in their
20
argument there was no argument as to why any one of
21
those provisions in any way ran afoul of Delaware law,
22
and, indeed, they don't.
23
24
But in their response brief, they say,
well, it would dissuade a buyer, it's a conclusory
CHANCERY COURT REPORTERS
54
1
statement.
And they cite the Pennaco case, and they
2
cite to a provision of the Pennaco case page 693
3
that's actually the background of the parties'
4
contentions being made in that case.
5
And the interesting thing about
6
Pennaco is it's actually very similar to this Court's
7
holding in Plains.
8
bidder strategy as well just as in Plains, and the
9
Court held, "It appears that the Pennaco board was
In Pennaco, that was a single-
10
careful to balance its single-buyer negotiating
11
strategy by insuring that an effective post-agreement
12
market check would occur.
13
provisions leave the purchaser exposed to competition
14
from rival bidders with only the modest and reasonable
15
advantages of a three percent termination fee and
16
matching rights.
17
termination fees level is make weight and at odds with
18
precedent upholding the validity of fees at this
19
level."
20
The merger agreement's
The plaintiffs' attack on the
Pennaco supports denying the
21
injunction without even letting it get out of the
22
gates.
23
enjoin deal protection mechanisms that comply with
24
Delaware law," that's not a proper request.
The simple injunction of "we're going to
CHANCERY COURT REPORTERS
And
55
1
without more, even with respect to the rest of the
2
plaintiff's arguments, I don't think it's an
3
injunction that can be granted.
4
But I also think the rest of their
5
arguments -- let me just also say that as we said
6
earlier, it's not in their motion that the deal
7
protection mechanisms -- when I read their motion, I
8
got to the end, I got to the conclusion, I thought I
9
must have missed the page where they challenge the
10
deal protection mechanisms.
11
They don't challenge them.
12
don't analyze them.
13
protection mechanism is invalid for this reason.
14
simply say "I want to enjoin them."
15
It's not in the brief.
They don't cite law.
They
They don't say, well, this deal
THE COURT:
They
Well, the argument I think
16
is the sale process was bad, and the way to cure a bad
17
sales process is to do a go-shop, and if you're doing
18
a go-shop, that would have to be inconsistent with
19
some of the deal protection devices.
20
MR. HOLMES:
Perhaps that's the gist.
21
I don't read that in their papers that they want a
22
go-shop period.
23
protection mechanisms that have been found by this
24
Court time and time again to be reasonable and to be
They just want to enjoin deal
CHANCERY COURT REPORTERS
56
1
enforceable.
2
They are a part of the bargained-for
3
consideration.
4
bargained, hotly bargained.
5
think the bid/ask spread was somewhere between 30 and
6
160, and it got to 65.
7
overall package of consideration that was negotiated
8
between C&J and between Nabors.
9
These deal protection mechanisms were
The termination fee -- I
So these were part of the
But the Court raises the point of,
10
well, you had this -- we heard it, there's a broken
11
process, and there's a negative premium.
12
before I get into the process, I want to point out a
13
couple of things just to start out of the gate, things
14
that I heard.
15
Actually,
This notion that the C&J board viewed
16
this as an acquisition and was never informed or never
17
told or never thought about that this might be Revlon
18
or something like that -- obviously, I know we have
19
this argument about was it Revlon, is it not, but the
20
C&J board was, in fact, advised that this potentially
21
could be viewed as Revlon.
22
And I will quote from Mrs. Ma's
23
deposition at page 24.
24
counsel.
"We were presented by legal
They actually walked us through a
CHANCERY COURT REPORTERS
57
1
presentation of what this transaction was and what the
2
Revlon rules were and took the whole board through it
3
on a call," and that's page 24 -- that's page 24,
4
lines 14 through 19.
5
Then, in the proxy -- and Your Honor
6
doesn't need to turn to it in the binder for just
7
looking at the proxy.
8
section, there is also a reference that the board was
9
advised of its legal obligations by legal counsel at a
10
In the background of the proxy
board meeting.
11
So this notion that, well, it's an
12
acquisition or is it a sale, you know, that really
13
gets into the difference between what the business
14
transaction is and how we -- legally how it fits into
15
our hierarchy.
16
Now, let me talk a little bit about
17
that transaction because I don't know if there's been
18
much discussion of it so that the Court understands
19
the transaction.
20
business which essentially means that it assists
21
companies drilling a well, completing that well.
22
C&J is a completion services
A lot of times it's hydraulic
23
fracturing, horizontal drills, or it's horizontal
24
drill sites.
They come in, they help fracture the
CHANCERY COURT REPORTERS
58
1
well.
2
flow.
They fracture the rock so that the oil can
3
So C&J operates a fleet of trucks, and
4
the way these companies work, or the way you think of
5
them is how many horsepower do you have, how many
6
horsepower of hydraulic fracturing do you have.
7
C&J has about 600,000-horsepower.
8
And they have back orders from their customers.
9
And
It's all utilized.
So C&J was in the position of "we need
10
to expand," and you can do that by building, or you
11
can do smaller acquisitions.
12
build, it's going to take two or three years, and you
13
might miss the window right now that is there.
14
is obviously a demand for completion services
15
businesses.
16
I suppose.
But if you
There
So Nabors has 400,000-horsepower,
17
500,000-horsepower of hydraulic fracturing equipment
18
that's under utilized.
19
of the leading -- maybe the leading land driller.
20
Nabors is a land driller, one
Completion services is a specialty
21
business.
In the words of Adrianna Ma who was deposed
22
last Friday, this was an under utilized set of assets,
23
and that was the real opportunity.
24
and we'll look at the testimony, but the board knew
The board knew --
CHANCERY COURT REPORTERS
59
1
that Nabors' completion and production services
2
business had been declining.
3
utilized.
They knew it was under
4
The question to Josh Comstack and the
5
board was not what could Nabors do with these assets,
6
because it was clear that they were being under
7
utilized.
8
C&J is a company that Mr. Comstock started with one
9
truck in 1997 and has built it to the company it is
It was what could C&J do with these assets.
10
today he is a hands-on CEO.
11
He is integral to this deal and integral to the C&J.
12
He knows his business.
So the question is not what can Nabors
13
do.
14
and the EBITDA number for what the Nabors stand-alone
15
forecast is in 2015, it's a point for negotiating, but
16
in terms of the business logic of this deal, they
17
weren't buying it because what Nabors could do with
18
it.
19
they could do with it and how they thought they could
20
use it.
21
That's why this talk about the EBITDA multiple
They were buying it because of what they thought
So that's the business.
So when you
22
see acquisition, that's the business sense.
23
doesn't inform how they were advised from a legal
24
sense that the legal rules might apply.
CHANCERY COURT REPORTERS
It
60
1
THE COURT:
Help me understand.
The
2
collective of the C&J shareholders right now own
3
100 percent of the company.
4
they'll own 47 percent of the company.
5
me like they sold control, and that sounds like a
6
sale, and it doesn't sound like the board unanimously
7
approved the company's acquisition of Navy.
8
MR. HOLMES:
9
The deal goes through,
Sure sounds to
So, again, I think the
word "acquisition" there -- again, that's in the board
10
minutes.
11
was handed up.
12
the word "acquisition."
13
from a business standpoint.
14
proxy statement, from Miss Ma's deposition testimony,
15
there's no doubt that the board was advised of their
16
responsibilities regarding a sale.
17
I don't believe that was the resolution that
But in the board minutes, it does use
Again, acquisition is maybe
There's no doubt in the
And if it was viewed as a sale of
18
control, what it would look like now, when you say
19
giving 53 percent sure sounds like a sale of
20
control -- let me just say our argument today doesn't
21
depend on whether it's business judgment or Revlon.
22
We think the board met both standards.
23
24
Okay.
But to focus on this for a minute, if
it was just a sale of 53 percent without more, then,
CHANCERY COURT REPORTERS
61
1
sure, you might say that is a sale of control.
2
that's not it all.
3
53 percent represent.
4
recognized in QVC, if you had limitations on the sale
5
of control, then that might take it out of a sale of
6
control.
7
But
The question is what does that
And as the Supreme Court
In this case -- and I'm not going to
8
go into them chapter and verse because they're very
9
long, and it would consume the afternoon, but there
10
are a number of provisions that limit Nabors' right to
11
control this business.
12
There are super majority voting for
13
various items on the board.
14
are current C&J board members.
15
which I think is mainly lawyer argument, that these
16
guaranteed five-year four board seats or four of them
17
somehow created a conflict.
18
board members were subject to challenge.
19
there's no allegations at all that any of the board --
20
that the board seats are at all material to any of the
21
board members.
22
Four of the board members
There's this notion,
First of all, none of the
Second,
That is critical under Delaware law.
This Court in TriQuint rejected the
23
notion that continuing board seats create a conflict
24
without some particularized allegations that the board
CHANCERY COURT REPORTERS
62
1
seats were material.
2
the complaint.
3
motion.
There are no such allegations in
There are no such allegations in the
4
So the notion of does 53 percent
5
represent control, it is a -- the question is what do
6
they get for it, can they actually exercise control,
7
and I don't think they can when you look at the menu
8
of control-limiting provisions that were included in
9
this deal.
You certainly can't do so --
10
11
THE COURT:
Some have durational
limits on them though.
12
MR. HOLMES:
That's fair.
Some do
13
have durational limits and something -- when you say
14
about duration, can they be forever.
15
think they can be forever.
16
THE COURT:
17
No, I don't
I mean -You get to be my age, five
years sounds a lot longer than it does to you.
18
MR. HOLMES:
One?
Can it be one year?
19
I don't think it can be one year.
20
sure about that.
21
Five years, in the life of a company, life of a
22
publicly-traded company, is an awfully long time on
23
the horizon.
24
Two years?
I'm not
Three, four, five, six, seven years?
There's no -- particularly over that
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1
time frame, if Nabors sells down, which, obviously,
2
they have no legal obligation to do that, but if
3
Nabors sells down, they may not be a controller in
4
five years.
5
If the business is sold within five years to somebody
6
else, the right to a control premium is locked in.
7
The business may be sold in five years.
So there are a number of things, in
8
our view, that take this out of a sale of control and
9
put it into a non-Revlon category.
So the reason that
10
it went over 50 percent was the inversion which is a
11
tax benefit to the C&J shareholders.
12
THE COURT:
I have negative reactions
13
to deals made for tax purposes.
14
find your judge as you find them.
15
of bad things be done in the name of trying to save
16
taxes, and inversions aren't exactly the most
17
politically popular thing in the world these days.
18
MR. HOLMES:
That's just -- you
I have seen a lot
There have been an
19
article or two written about inversions, and it is
20
obviously very widely known that this is an inversion.
21
It is disclosed in the proxy.
22
The plaintiffs make some comments
23
about that it's a -- some illegal inter-company loan.
24
The fact of the matter is whatever anybody's personal
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1
feels are, with all due respect, it's a legal
2
transaction.
3
our laws, and it's disclosed in the proxy.
4
THE COURT:
It's a transaction that's permitted by
Don't read anything into
5
my comments, but it's an interesting issue, and the
6
question is when I start balancing the public
7
interest, which is sort of a subset of the balancing
8
of the equities, is this something I should consider.
9
My inclination is no, but I don't think you're going
10
to argue with me on that.
11
MR. HOLMES:
No, I'm not.
12
That's the acquisition.
Let me move
13
to the other thing that I had to jump out.
They said
14
there was no evidence that 445 million was
15
management's best evidence.
16
response, and it is in your binder as Exhibit A, is
17
the affidavit of -- B, excuse me, Randy McMullen.
18
have to go back.
19
are a number of tabs, and then within the numbered
20
tabs, there are letter tabs.
Well, attached to our
It's Tab 6 at the very back.
21
THE COURT:
22
MR. HOLMES:
You
There
I figured it out.
Second page -- third
23
page, excuse me, paragraph seven -- let me tell you
24
who Mr. McMullen is.
He's the chief financial officer
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1
of C&J.
He's also a board member.
2
by the plaintiffs.
3
going in, looking at Nabors' financials and their
4
reports and coming back with a number that he thought
5
was supportable for Nabors as a stand alone.
6
He was not deposed
He was one that was in charge of
He says in paragraph seven, "As
7
management informed the board, $445 million reflects
8
management's expected or base case for EBITDA for the
9
Nabors assets for 2015."
10
Now, Mr. Jeffers, their expert, who
11
I'm not sure was mentioned in the argument, he has no
12
opinion on whether it's 445 million or some other
13
number.
14
other respects, simply comes from sound bites from
15
certain emails that get pulled out of context.
16
like trying to do a dot-to-dot, but only given a tenth
17
of the dots.
18
the context.
Plaintiff's case, in this respect and on many
19
It's just sound bites.
It's
You don't know
Mr. Jeffers, his report where he says
20
it's -- in his report he says 408 million, not
21
445 million.
22
have an opinion on that.
23
point, and this is page 45, lines 11 through 24,
24
"Question:
When we deposed him, he said he didn't
What he says is, on this
Now, you think that the projected EBITDA
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1
for 2015 for the Nabors business should be
2
408 million?
3
4
Answer -- objection by Mr. Sabella.
I
want to be fair.
5
"Answer:
What I'm saying, and I'm
6
really repeating what the C&J staff said, and that is
7
that these were the upside case.
8
in his transcript in his deposition and McMullen said
9
it in the emails.
Comstack said that
So I took them at their word this
10
was not their best case.
11
not here to tell you that 408 is the right number.
12
I'm only here to tell you what they said."
13
It was an upside case.
I'm
So their expert is doing the same
14
thing.
He's looking at the email, and I think there's
15
briefing on this, and I can talk about it, about the
16
445 million.
17
you look at the question Mr. Comstock was asked, and
18
in the binder his exhibit is -- his affidavit is
19
Exhibit 6-C.
20
Then Mr. Comstock's deposition where, if
Mr. Comstock says, look, I didn't mean
21
to imply in my deposition that 445 million was the
22
upside case.
23
top of page three, "Just to be clear, the 445 million
24
is an upside case, just not as aggressive as they are
The question is -- first question at the
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1
being.
2
Yes.
The downside case or run rate is much lower.
Do you agree with that as of June 21st?
3
"Yes."
4
He said, "I didn't mean to say that it
5
was an upside case."
6
Mr. McMullen's affidavit, Mr. Comstock's affidavit and
7
the two emails, the language about the upside case was
8
language Mr. Comstock added to Mr. McMullen's email
9
prior to forwarding to the Mr. Petrello.
10
The fact is when you look at
It was done because Mr. Comstock is a
11
shrewd negotiator.
He wanted to tell Mr. Petrello
12
"The upside case, the 445 million that's below in
13
Randy's email, it's an upside case, it's not our base
14
case."
15
McMullen and Josh Comstack, and you can also compare
16
the emails which are exhibits in the main section,
17
Tabs R and S in the binder.
You can look at the affidavits of Randy
18
Tab R.
So the email that the plaintiffs put
19
up was what's behind Tab S, and it has the language at
20
the end, "Our number more fairly reflects what the
21
business can do.
22
an upside case."
23
24
Just to be clear, the 445 million is
In Tab R of our binder is
Mr. McMullen's email to Mr. Comstock, the one where it
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1
ends in Mr. Comstock's inbox, and that language isn't
2
on there.
3
he didn't write the language.
4
testified in his affidavit, he added that language
5
before he sent it on to Mr. Petrello.
6
As Mr. McMullen testified in his affidavit,
As Mr. Comstock
But to be clear, that right there,
7
those two emails, that's what they're talking about
8
when it's "is the 445 the upside case or not."
9
not expert analysis.
It's not anything.
It's
It's simply
10
pulling emails out of context and trying to base a
11
conclusion off of it.
12
The fact is when you look at the email
13
that the plaintiffs handed up which is behind Tab S of
14
our binder, Mr. McMullen did a detailed review of
15
Nabors' financials.
16
could do as a standalone.
17
business logic of this deal, it's not the driving
18
business logic of the deal.
19
Remember, this was what Nabors
When you think about the
It's why Director Ma in her deposition
20
said, you know, "That's one year based on what Nabors
21
can do in their hands.
22
this deal.
23
hands."
24
That's not why we're doing
It's what we can do with the assets in our
So the last point before I talk about
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1
the entire process is this notion of this is a
2
negative premium.
3
it was a negative premium.
4
expert testimony on their side that this is a negative
5
premium.
6
is not evidence.
7
I don't know how many times I heard
There's absolutely zero
It is legal argument, and that is it.
That
When you look at -- remember,
8
Mr. Jeffers, their expert who was who was designated
9
to do a valuation of both Nabors and C&J, as we set
10
forth in our motion in limine, he didn't do a
11
valuation of either.
12
attached to his report, Schedule 1 which in his
13
deposition he said was an illustration, and earlier we
14
saw the testimony he wasn't sure 408 was right.
15
used 408 in the illustration to calculate a positive
16
premium.
17
it's right or wrong, it's one year in 2015.
18
And he set forth a schedule
Remember, that's a one-year number.
He
Whether
But when we pressed him on whether or
19
not he had a opinion after these admissions that,
20
"Well, it's just an illustration.
21
valuation.
22
sure the EBITDA multiple in there -- I'm not here to
23
testify about that."
24
I didn't do a
I'm not sure 408 is right, and I'm not
So on page 119 of his deposition, I'm
CHANCERY COURT REPORTERS
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1
reading lines three to line 15, "Question:
2
Schedule 1 to your report which is marked as Exhibit
3
5, I believe, is an illustration.
4
definitive opinion that there was a premium or a
5
discount paid in that transaction.
6
7
"Answer:
You don't have a
Definitive opinion by which
you mean a number?
8
9
So
"Right.
You haven't done a
calculation.
10
"I have not done a calculation.
11
"So you do not have a definitive
12
opinion on that.
13
"I don't."
14
He has an illustration under certain
15
assumptions that may or may not be accurate, that he
16
doesn't know whether are right or wrong, and that's
17
the only basis they have in the record for whether
18
there's a negative premium or a positive premium.
19
The fact is the board and Citi -- and
20
the board believed there was premium, that C&J was
21
receiving a premium, and Citi and Tudor presented to
22
the board materials reflecting that C&J was receiving
23
a premium in this transaction.
24
THE COURT:
While you are in my notes,
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why don't you talk about stretching the EBITDA
2
multiple from six to 6.5.
3
MR. HOLMES:
Okay.
4
That is -- first, that is kind of a
5
general category.
6
are conflating negotiation tactics with valuation.
7
think maybe as I'm addressing this, the easiest thing
8
to do is we have a time line that's behind Tab 1 of
9
the binder.
10
What the plaintiffs are doing there
I
It's helpful to understand what was going
on around this email to understand the email.
11
Now, there's no doubt that this was
12
nothing more than a negotiation tactic.
This email
13
was in June of 2014.
14
exceed 2.925 in value, subject to due diligence,
15
subject to board approval, that had been agreed back
16
in May.
17
letter of intent.
Now, remember, this 2.925 not to
So what's happening -- in a non-binding
18
What's happening in May and June is
19
due diligence.
And in the middle of June, Mr.
20
Comstock, because of things he's seeing in the
21
business, actually threatens to walk away from the
22
transaction just like the CEO in Plains did in that
23
case.
24
meeting -- and part of why pencils go down has to do
He said pencils down.
There's been a
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1
with these forecasts and trying to get comfortable
2
with the business.
3
So there's a meeting that -- remember,
4
we're still at 2.925.
In the context of they're
5
trying to get their hands around the business and
6
what's going on, Mr. Comstock says at that same time,
7
"We'll offer you 2.8.
8
2.8."
9
here was 2.86.
We're going to reduce 2.925 to
Remember, the deal price that was agreed to
10
It's a reduction from 2.925.
So the "stretch" email was said in the
11
context of negotiating with Mr. Petrello to get from
12
2.925 to 2.86.
13
So that's the context of the email.
Director Ma was asked about this
14
question, did she know, and her testimony -- let me --
15
first of all, she says the board knew the multiple
16
that was implied by the price.
17
So they keep asking her did you know
18
that he said stretch, did you know he said stretch.
19
And she says, "Look, they were so many discussions
20
happening.
21
multiple of 2015 that you're paying for this business.
22
Of course the bankers will run it.
23
the transaction as a whole, multiple off one year off
24
of one business, it is -- in isolation it is not
I'm sure we asked what his implied
But when you take
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1
something that the board -- I don't know that I would
2
even consider that a material piece of information
3
that he had to disclose much less to be a driver of
4
the deal."
5
And the reason for that is, remember
6
what the business logic of this deal is.
7
or what the projections of Nabors were, was what
8
Nabors could do with it.
9
with it.
10
445 million,
We knew what Nabors could do
C&J was buying this because of what C&J
could do with this.
11
But here's what's more important about
12
this.
13
tactic.
14
did that," what's more important is the board knew
15
exactly the multiple that was implied by the price and
16
knew how that compared to the peer group.
17
Whether he said, "Hey, here is my negotiation
I told him I'd be willing to do this if he
Miss Ma testified -- what I just read
18
from Miss Ma was page 54.
19
board recognized the multiple we're paying for NCPS,"
20
which is the Nabors business, "going into this deal,
21
and we recognized at that point in time what the peer
22
groups were trading at."
23
24
On page 55, she says, "The
There was nothing hidden from the
board.
The board knew full well what the multiple
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1
implied by the purchase price was and knew how it
2
compared to the pierce.
3
places in her testimony where she says that.
4
I think there's repeated
The one last thing before -- I see you
5
glance at the clock -- is that the multiples are
6
reflected in the -- if you turn in our binder to the
7
Citi and Tudor Pickering presentations, Citi's is X,
8
1-X.
9
So on page five are the implied
10
transaction multiples, and you can see kind of in the
11
middle of the page Q2 '14 through Q1 '15 is the 7.3
12
times implied multiple, 2015 estimated 6.4 implied
13
multiple.
14
And then if you turn over to page
15
nine, it shows what the ranges of the multiples from
16
the selected public company analysis is; in other
17
words, from the peer group selected by Citi, and it
18
reflects 6.3 times to 7.4 times and 5.3 times to 6.3
19
times.
20
That's the ranges.
The board was advised of that.
Mr.
21
Comstock, in sending that email -- he's obviously a
22
very consummate businessman when it comes to running a
23
completions business.
24
So for him to say, "Well, I'll be willing to increase
He's not an investment banker.
CHANCERY COURT REPORTERS
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1
it a turn based on this," that is a negotiation tactic
2
and nothing more.
3
it's anything more than that.
4
5
There's no evidence to support that
THE COURT:
No evidence whatsoever.
With that, let's take ten
minutes.
6
(At this time a short recess was taken)
7
MR. HOLMES:
Let me now turn to a
8
brief summary of the overview of the process, and I
9
want to try to focus on and say a couple of things.
10
First of all, something I think has gone -- it's in
11
our brief, but I want to make sure the Court
12
understands, is Mr. Comstock owns 10 percent of this
13
company.
14
of the largest stockholders.
15
He is roughly about 10 percent.
He is one
I think that's a very material fact
16
when you're looking at is there a conflict of interest
17
or is there not a conflict of interest.
18
same fact was before the -- I keep saying the Plains
19
case.
20
similar to Plains.
21
Court found in the Plains case in terms of reasons why
22
Mr. Flores -- Mr. Flores in that case was found not to
23
have the conflict.
24
I this that
I really do think this case is very, very
It's very similar to what the
I think the same is true here, and I
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1
think that reason -- because he's such a large
2
shareholder, because he founded this company, drilled
3
a lot of his decisions which we're going to go
4
through.
5
So I think maybe the best way to do
6
this is behind Tab 1 is this time line.
I'm going to
7
kind of walk through certain points of this time line
8
kind of to -- I won't go through, I promise, every
9
point.
The Court can just rip it out of there if
10
you'd like because I'm going to go through some
11
documents also that are in the binder to go with it.
12
To tell the Court the way the time
13
line works is you'll see behind certain of the entries
14
there's a letter.
15
top left, C&J proposal of 2.6 billion, there's a
16
letter (C).
17
the binder, so that's why I was suggesting maybe just
18
pull it out.
19
those cross referenced tabs.
20
Like if you look at April 4 in the
That corresponds to Tab C behind two in
I'm not going to go through each of
Now, I think looking at this time
21
line, on April 4, there's an offer from C&J that's a
22
proposal, non-binding letter of intent for up to 2.6
23
billion subject to due diligence.
24
framework that's utilized for the offers.
That's the basic
CHANCERY COURT REPORTERS
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1
issues in this case is what authority did Mr. Comstock
2
have in negotiating the non-binding letter of intent.
3
The plaintiff said in their argument
4
that, well, he had authority to do the 2.75 billion
5
letter of intent, and that's supported by document J.
6
Well, that is the letter of intent, but there are
7
emails in H which is the email the plaintiff
8
referenced giving authority for the 2.75 billion.
9
But what plaintiff says is, well, Mr.
10
Comstock unilaterally went up to 2.925 billion, and we
11
just don't think that that's accurate.
12
they rely on the testimony of Director Stewart.
13
First of all,
Now, Mr. Stewart said -- if you look
14
at Mr. Stewart's deposition and testimony, he said --
15
he says, "I don't recall, I don't recall.
16
have the benefit of documents.
17
I don't
I don't recall."
The one thing you don't see
18
Mr. Stewart say, despite being presented with these
19
facts at his deposition, was "I didn't know he did
20
that.
21
shouldn't have gone that far."
22
that.
23
24
I didn't know he had gone that far.
He
He never once says
And when you look at the proxy which
is behind Tab AA -- again, they don't challenge -- we
CHANCERY COURT REPORTERS
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1
talked about not having disclosure claims, but they
2
don't challenge this part of the proxy either where it
3
says -- and this 2.925 offer or the 2.9 offer was made
4
on April 25th.
5
On page 65 of the proxy, the paragraph
6
says "Between April 23rd and April 25th 2014, members
7
of the C&J board of directors discussed the
8
appropriate response to Mr. Petrello's letter."
9
That's a reference to the April 23rd letter that's
10
here on the time line, the $2.75 billion proposal.
11
So one of the points they said is,
12
well, Mr. Comstock didn't have authority to go up to
13
2.925 billion.
14
if you look at Adrianna Ma's testimony, in a variety
15
of places, her testimony is, look, at the initial
16
board meeting on April 3rd, the board discussed a
17
range of values, and if you look at the book, the
18
range of values were between 2.6 and three.
19
Well, the proxy refutes it.
And then
And what the board said is, look, the
20
authority to Josh was go out and negotiate a
21
non-binding letter of intent that gave us the right to
22
do due diligence that was subject to board approval
23
that was under $3 billion.
24
She said, and I'll quote the
CHANCERY COURT REPORTERS
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1
testimony, "He didn't have to come back to us, but he
2
chose to come back to us, chose to keep us involved
3
because that's the way he treats his board."
4
So in talking about did anybody see
5
the letter, this $2.9 billion letter which was
6
introduced, the 2.925 letter which was introduced as
7
an exhibit to Miss Ma's deposition, and she says --
8
testimony at page 43, line seven through 12, "The
9
methodology and the value in that letter is one that I
10
knew well and I thought was very, very creative before
11
he inked it.
12
minutes" -- and let me go back to that, "isn't a
13
reflection of how deliberative he was with the board
14
as he was going through the negotiation."
The fact that it doesn't show up on the
15
Now, the minutes were -- there was an
16
April 29th board meeting at which there was an update
17
given to the board.
18
they are also in the binder behind Tab M on page
19
three, it says, "Next, Mr. Comstock provided an update
20
on the status of negotiations surrounding Project
21
Navy, including Navy's April 23, 2014 response to the
22
Company's initial offer letter, Navy's first quarter
23
financial results and Mr. Comstock's further valuation
24
discussions with Navy's CEO."
And the board minutes say, and
CHANCERY COURT REPORTERS
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1
Now, the plaintiffs say, well, there's
2
no -- the letter that was sent is not attached, it's
3
not specifically referenced, and what Director Ma says
4
is, "Well, it may not be specifically referenced, but
5
I knew that letter well.
6
thought it was very, very creative before he sent it
7
over.
8
referenced doesn't mean we didn't discuss it during
9
that board meeting."
I knew the methodology.
I
And the fact that it's not specifically
10
So her testimony is, "I did actually
11
see that letter."
12
Whether she saw the letter or not, she said she didn't
13
need to see the letter.
14
numerous questions in the deposition about what his
15
upper limit of authority was.
16
But here's the other thing.
The question was -- there's
On page 43, "Question:
What was the
17
upper limit of Mr. Comstock's ability," which I think
18
should be "authority."
19
"He indicated to us that Tony's ask
20
was 3.2 billion which was Mr. Petrello's ask on
21
April 10th.
22
billion and ask for our support.
23
Josh was go in what you have to do to get a
24
non-binding LOI so we can go and do the diligence but
We would like to go in at around 2.6
Our indication to
CHANCERY COURT REPORTERS
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1
the 3.2 is tough.
3.2 billion as an ask would be
2
difficult for the board, and we indicated that to
3
him."
4
Turning over to page 49, line 18, "Our
5
marching orders to Josh was three billion probably too
6
high for us.
7
very compelling synergies to prove that.
8
absolutely yes.
9
and three billion, "do what you have to do to close
You're going to have to come back with
2.6
In between," meaning in between 2.6
10
the deal.
11
exactly that.
12
continued to demonstrate to the board the synergy
13
potential in the business and a 2015 outlook."
14
That was the marching order, and he did
Over the course of April to June, he
So going on, Mrs. Ma testifies in
15
several places he had the authority to go up to 2.925.
16
Remember, what he's doing in this period.
17
non-binding letter of intent, non-binding letter of
18
intent subject to board approval, subject to due
19
diligence.
20
It's a
And meaningfully, the deal price
21
didn't say 2.925 because in Mr. Comstock's and his
22
team's efforts, it went down to 2.86 which I think is
23
meaningful in terms of -- plaintiffs want to paint
24
this as some kind of -- it was a manipulated process
CHANCERY COURT REPORTERS
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1
to get a deal done for a deal sake.
2
price at 2.925, and then you negotiate for the price
3
to come down, that doesn't square -- and also in that
4
process threaten to walk away, that doesn't square
5
with getting a deal done for deal sake.
6
Once you have the
So let me read one other thing about
7
Mr. Comstock's authority from Miss Ma.
8
April 14th, was it the board's expectation that Mr.
9
Comstock would get back to you if Nabors would reject
10
11
It was, "As of
a $2.75 billion offer?
"It was never my expectation for Josh
12
to check with us every single step of the way in
13
arriving at an agreed upon price below three billion.
14
That's not viable to do diligence for the business and
15
go after the synergies.
16
every step of the way."
17
Josh chose to keep us abreast
Now reading on page 36 starting on
18
line ten, "Partly because he always keeps the board
19
involved, partly the board can be used potentially as
20
a tool for negotiation when you're trying to push the
21
other side and be a good cop bad cop.
22
use that as a tactic."
23
24
I've seen him
That was her expectation.
have to come back.
He chose to come back.
CHANCERY COURT REPORTERS
He didn't
He chose
83
1
to keep the board in the loop.
2
Now, April 29th, there's this
3
agreement, and it's an agreement on a valuation,
4
right.
5
subject to due diligence.
6
there's a board meeting in early May.
7
happens after that is Nabors gets some financial
8
results in.
Here's the valuation.
9
It's 2.925.
It's
What happens after that -And what
Mr. Comstock, Mr. McMullen see the
10
financial results, and one of the things the
11
plaintiffs say is, well, they didn't tell the board
12
that there was -- it's in their brief -- "creative
13
accounting."
14
out of an email that when you put it in context and
15
ask people what it meant, you get an understanding for
16
what it meant.
17
Again, this is another sound bite taken
Now, the situation was Nabors --
18
remember, it's a land driller.
It has an Oracle
19
customized system that's not exactly customized for a
20
completion services business, or at least not
21
customized in the way that C&J has its completion
22
service business financial software customized.
23
So there's certain categories that
24
you're trying to fill in for cost and revenue, and
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1
they were seeing things that didn't seem to make
2
sense.
3
testified to was utilization went up, meaning you had
4
trucks going more places, but logistics expense, i.e.
5
the cost of moving those trucks places, went down.
6
That didn't make sense to him.
7
was possible.
For example, one of the things Mr. Comstock
8
9
He didn't think that
So he sees these results, and he says,
look, this looks like creative accounting.
There's
10
another quote they use in the brief where he says
11
"funny math."
12
company to dig into the numbers like that, to roll up
13
his sleeves, dig into the numbers and figure out
14
what's going on, that is a lot more involved than the
15
average bear.
16
creative accounting.
17
expenses were finding themselves in other buckets
18
within their spread sheet.
19
this.
20
board.
21
Well, those emails, for a CEO of a
It doesn't mean that there was actually
And the board knew about
It was not something that was hidden from the
Let me turn back to Miss Ma's
22
testimony on page 70.
23
is page 71, line five.
24
The fact was those logistics
"Did Mr." -- question -- this
"Question:
Did Mr. Comstock ever
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1
inform you that Nabors was engaged in creative
2
accounting to make the numbers work?
3
"Answer:
Josh and I talked about the
4
business in the C&J business over that time frame had
5
also been eroding profitability.
6
difficult time for the entire completion services
7
industry, and it culminated in severe weather in Q1.
8
But even the likes of Halliburton were suffering.
9
was somewhat insulated."
10
It was a difficult,
C&J
So she goes and talks and talks about
11
the metrics, and she says, to skip through what was
12
happening, "So this division, the Nabors division,"
13
now on page 72 line 15, "that was doing completion and
14
production work were orphaned.
15
fitting what they do to a drilling operation which
16
leads to discrepancies in how you would translate
17
these accounts.
18
initiatives that Josh had put in place for integration
19
planning.
20
the math."
21
They were always force
That, in fact, was one of the biggest
We ended up having to hire a CTO just to do
But Mr. Comstock testified to the same
22
thing, and Miss Ma says, "Yeah, I knew about this."
23
Mr. Comstock talked about it with at least her and the
24
rest of the board.
So what's happening in May and
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June is not, as the plaintiffs say, this effort to get
2
a deal done for deal's sake.
3
is legitimate roll-up-your-sleeves, get down to it due
4
diligence by Mr. Comstock, the CEO, by Mr. McMullen,
5
the CFO; the two people who have run C&J for years and
6
made it what it is, and the two people who were going
7
to integrate the Nabors assets and run those the same
8
way they run their C&J assets.
9
It's the opposite.
It
Now, you turn over to -- behind Tab
10
Q, in June, Nabors is producing more numbers, its
11
financial run rate.
C&J is trying to get its hand
12
around the numbers.
And when I said earlier that C&J
13
was prepared to walk from the deal, it's here in Q
14
from Randy McMullen, June 16th, 2014, to his deal
15
team.
16
"Guys, please stop working on Navy.
17
We have hit a serious impasse and for now the deal is
18
on hold.
Thanks."
19
One doesn't put a deal on hold if
20
you're trying to get a deal done for deal's sake.
21
What happens -- plaintiffs have no -- this is not
22
contested, as far as I know.
23
is there's a meeting with Nabors, and then C&J's
24
management team, led by Mr. McMullen, goes to Nabors
What happens after this
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1
and sits down with their financial team and puts
2
Nabors' results in C&J's accounting system so he can
3
get a sense for what is actually going on with the
4
Nabors business on a stand-alone basis.
5
Now, when you've already got an
6
agreed-upon value of 2.925 billion, and if you want to
7
get a deal done for deal's sake, this isn't what you
8
do.
9
forecast that shows for 2015 it's going to be about
10
At the same time, Nabors is producing a financial
$500 million in EBITDA.
11
Now, if you want to get a deal done
12
just to get a deal done, as they say, and you can get
13
an employment agreement, then you would say, hey,
14
well, if you certify that this is what you can do --
15
it happens all the time -- you certify this is what
16
you can do and this is your best estimate, then we'll
17
do some due diligence.
18
But to go over to their offices, peel
19
it apart, put it into your system and to see what you
20
think they can do on a stand-alone basis, that doesn't
21
happen often.
22
is work being done by C&J's management to get
23
comfortable with the assets they are buying, to get
24
comfortable with the valuation that they are paying.
That is a lot of due diligence.
CHANCERY COURT REPORTERS
That
88
1
Why?
Because, as they say in multiple
2
emails, because they needed to make sure there was
3
shareholder value in this transaction.
4
Mr. Comstock, as a 10 percent shareholder, he is
5
aligned with the stockholders in this deal.
6
notion that he's somehow going to do a deal that
7
compromises his 10 percent interest -- we talked about
8
at the end of this transaction Nabors is going to be
9
53 percent.
10
11
He's 10 percent.
I would submit
This
He's one of the largest
stockholders.
After this deal, he's going to be --
12
he's not exactly at 10 percent, but approximately.
13
He's going to be around about 4.7 to 5 percent,
14
somewhere in that neighborhood.
15
53 percent share holding.
16
think that Mr. Comstock is going to put himself -- do
17
a deal that's not good for himself as a 10 percent
18
shareholder of this multi-billion dollar company that
19
he's grown from one truck simply to get a deal done
20
because it wasn't in the shareholders best interests,
21
that's what's going on in June.
22
$445 million number.
23
24
And he's got a
It just strains logic to
They get to this
Now, behind Tabs R and S -- we talked
about that earlier.
I was talking pretty fast as
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89
1
sometimes I do, and I don't know if the Court can see,
2
but Tab R, that's the email from Randy McMullen
3
that -- it's the one that ends in Mr. Comstock's in
4
box.
That's the email string.
5
And if you look down on June 21st, at
6
the bottom of this email you see June 21st, 2014 at
7
3:24 p.m.
8
changes we made to the forecast and why.
9
2015 EBITDA is $445mm for Navy.
10
"Below is the description of the various
The revised
I'm available to
discuss."
11
And then he goes through the base line
12
assumptions, and if you turn over the page, you look
13
at all the things Mr. McMullen did when he went in,
14
all the assumptions he changed, all the inputs, how
15
they got there -- plaintiff's expert, remember, he
16
doesn't know whether 408 is the right number.
He
17
doesn't know whether 445 is the right number.
He
18
doesn't know if 508 is the right number.
19
There's nobody to contradict the work
20
that Mr. McMullen did to get to 445 million.
21
it on to Josh.
22
the email at the top of Exhibit R that ends up with
23
the upside case language in it.
24
He sends
If you look at the top email, this is
If you look at the top email here in
CHANCERY COURT REPORTERS
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1
Exhibit R and you turn over to Exhibit S and you look
2
about halfway down, you'll see "The overall theme is
3
that 505 million of 2015 EBITDA," that email, that's
4
the same email at the top of Exhibit S that Mr.
5
Comstock is now forwarding to Mr. Petrello.
6
But now there appears a sentence on
7
the end, two sentences on the end to be technically
8
accurate.
9
business can do in an improving market.
10
"Our number more fairly reflects what the
Just to be
clear, the $445mm is an upside case."
11
Look at the affidavits of Mr. Comstock
12
and Mr. McMullen.
13
that language."
14
before he sent it to Mr. Petrello.
15
was being a shrewd negotiator, not because he was
16
trying to get a deal done just to get a deal done; not
17
because he was trying to signal.
18
Mr. McMullen says, "I didn't write
Mr. Comstock added that language
Why?
Because he
So based on the 445 million, Mr.
19
Comstock goes back, and about the same time says "I'll
20
do this deal for 2.8 billion," and the parties settle
21
at a valuation not to exceed 2.86 billion which is
22
comprised of stock, which represents about 53 percent
23
and about 900 million in the assumption of debt.
24
If you look at the chart in the time
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1
line, the bottom is a stock price chart, and as
2
Director Ma said, it was a very good time for C&J to
3
use its stock to do a transaction.
4
The stock price had been trading at a
5
very high multiple.
Now, the board did this deal, and
6
it did not have to give to Nabors a down side collar.
7
That was not part of the negotiations.
8
part of the merger.
9
stock was at a very high multiple, and the board was
It was not
The stock price was done when the
10
aware of that.
The board knew it was a good time to
11
use stock to do a deal.
12
and considered these angles of the negotiations and
13
whether to use the stock.
14
The board acted reasonably
Now, when you get to the final two
15
board meetings June 23 and June 24, you have a
16
presentation on June 23 by Citi of synergies.
17
spend a lot of time on that.
18
a lot of argument about, well, synergies this and
19
synergies that.
20
business people who run this business, whose business
21
judgment it is, who have built C&J, think that the
22
synergies that are reflected in these presentations
23
are achievable.
24
That's Tab B.
I won't
There was
Again, that's legal argument.
The
Now, on June 24th, there's the final
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1
board meeting at which the board approves the deal.
2
There's a couple of things that are remarkable about
3
this board meeting.
4
executive sessions that are reflected in the board
5
minutes, and it's reflected in the proxy statement.
6
There are two executive sessions by
First of all, there are two
7
the non-management members of the board of directors.
8
They met before the meeting to talk about the deal,
9
and then after they had presentations from Citi and
10
Tudor, they met again to talk about the deal.
11
In the context of a transaction
12
somebody is trying to say that Mr. Comstock
13
manipulated or dominated, I think to me that is
14
something that stands out on that board meeting.
15
Now, there's no doubt also that Citi
16
and Tudor provided detailed presentations, and one of
17
the things that they talked about was whether or not
18
there was a premium.
19
consider a control premium or not, the board
20
absolutely considered whether there was a control
21
premium.
22
This idea of did the board
This is Miss Ma's testimony on page
23
25, line 13.
"Do you remember a June 24th board
24
meeting where you discussed the potential acquisition
CHANCERY COURT REPORTERS
93
1
of NCPS?
2
"Yes, I do.
3
"Question:
During this meeting, was
4
there any discussion of the control premium that C&J
5
stockholders would receive for their stock?
6
"Yes, there was.
We discussed the
7
value that needs to come to the C&J shareholders as
8
part of this transaction, all along the way.
9
way we thought about the value which one can call a
And the
10
control premium, one can call it accretion to earnings
11
of the business, we broke it up into different
12
categories.
13
embedded in the value as coming to us in the form of
14
operating synergies on cost that's very much
15
identified."
16
We looked at the premium here that's
And she goes on.
I'm not -- it's a
17
very long answer.
18
different buckets, and this is on page 26 and then
19
again at the bottom of page 27 continuing through page
20
28.
21
viewed that its shareholders, C&J shareholders, were
22
receiving a control premium.
23
24
She goes on to talk about the
She talks about the different ways the board
One of the arguments was, well, but
they have to share that control premium with Nabors 53
CHANCERY COURT REPORTERS
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1
to 47.
Miss Ma answered that perfectly.
2
"The way we view" -- this is at the bottom of 27, line
3
21 through 25.
4
buckets that I just identified to you, none of it is
5
available to C&J on a stand-alone basis.
6
difference is zero to 47 percent."
7
She said,
"The way we view the premium, the
So the
In other words, yeah, Nabors may get
8
53 percent of them, but C&J stockholders are going to
9
enjoy value that they could not otherwise enjoy
10
without doing this transaction.
11
Now, Citi and Tudor Pickering's
12
analyses are Tabs X and Y.
13
June 24th presentation to the board, and on page 14,
14
it is the "Illustrative Implied Equity Value
15
Creation."
16
Behind Tab X is Citi's
Now, remember, as set forth in the
17
motion, their expert has no criticism of the Citi or
18
Tudor Pickering books other than his quibble with the
19
445 million.
20
That's not because he can tell you which is right.
21
That's just based on his reading the documents that
22
were supplied to him by plaintiff's counsel.
23
24
But that's just based on the documents.
So there's no evidence in the record
that would contradict or controvert in any way what's
CHANCERY COURT REPORTERS
95
1
in Citi or Tudor's books.
2
If you walk through this analysis,
3
"Implied Standalone Copper DCF Equity Value, Implied
4
Standalone Navy C&P DCF Firm value."
5
two.
6
Combine those
And then you have a "Capex Adjustment
7
and Improvement of Cost of Capital due to
8
Acquisition."
9
heard were not taken into account that reduced the
10
That's the integration costs that we
synergies.
11
Then you got the "NPV of Potential
12
Synergies, Incremental Net Debt," and you get all the
13
way over and you see "Implied Pro Forma Equity Value"
14
before tax benefits, so they calculated it before the
15
tax benefits of 11 percent and with the tax benefits
16
15 percent.
17
At the bottom of the page, you see
18
it's immediately accretive to earnings per share from
19
4.11 -- this is on page 15 -- from 4.11 to 5.20,
20
5.30 -- that's in 2015.
21
dollar per share accretive to the earnings.
22
So that's almost over a
Based on that information, the board
23
believed it was getting a control premium.
24
believed it was getting these assets, almost half a
CHANCERY COURT REPORTERS
It
96
1
million worth of horsepower of hydraulic fracturing as
2
well as some other assets, some fluid hauling and some
3
other things, getting it at a price that was at a
4
discount to what those assets could produce in C&J
5
management hands, and because C&J's management could
6
do more with those assets immediately -- remember, as
7
Mr. Comstock testified, 100 percent of their assets
8
were utilized.
9
a premium to their stockholders immediately.
10
They needed more.
They could deliver
Just I'll quickly mention -- I won't
11
go through it, but in the Tudor analysis, Tudor has a
12
similar analysis, and this is behind Tab Y on pages 16
13
and 17.
14
status quo copper and pro forma copper, which is C&J
15
stand-alone and the combined company, and you can just
16
see the DCF range -- just looking at a DCF range which
17
of course depends on terminal multiple and other
18
things selected by Tudor, it's showing that it's --
19
that together it's worth more than stand-alone.
20
the same thing is shown kind of in a different way on
21
page 17.
22
It has an implied equity value per share
And
So the board of directors of C&J --
23
certainly, one, Miss Ma testified, yes, we were
24
advised by counsel regarding the application,
CHANCERY COURT REPORTERS
97
1
potential application of Revlon and what it implied.
2
The proxy confirms that.
3
control premium and the value that we needed to
4
deliver to C&J shareholders all along the way, and we
5
thought we were getting, our view, based on all the --
6
she says not only on my own work but on the work that
7
Citi and Tudor did.
8
9
And we talked about a
I'm loathe to encourage the Court to
read anything more than we have submitted.
Her
10
deposition is about 75 pages.
11
with their version of the case.
12
somehow she's co-opted which I heard for the first
13
time today, I honestly found it hard to square.
14
It can't be squared
This notion that
In her deposition, she said, well, Mr.
15
Comstock asked if your CEO, a CEO of a private equity
16
company, might be willing to consult to help on this
17
deal and that was in an email.
18
you ever do it and she says no.
19
asked.
20
from that testimony is that she was co-opted.
21
And then he said did
Why not?
He never
So I don't know how a remotely fair inference
Again, the other thing I want to
22
mention about Miss Ma is set forth in her affidavit
23
which we submitted with our response.
24
herself, a large shareholder of C&J.
CHANCERY COURT REPORTERS
She's, in
She owns about
98
1
5000 shares of common stock, and the value to
2
General -- the shares owned by General Atlantic is
3
almost 6 million shares, which is roughly about
4
10 percent.
5
Atlantic has bought more shares of C&J since this deal
6
was done.
7
get to when we get -- when I close out on balance of
8
equities.
General Atlantic -- in fact, General
And it supports this transaction which I'll
9
So the board approves it June 24th.
10
One of the things that had always been out there was
11
that C&J management would continue to run the combined
12
company.
13
manage that issue or any potential issue, and that
14
process was there would be no negotiation of any
15
management contracts for C&J officers until after the
16
terms of the merger agreement were substantially
17
agreed upon.
18
Now, a process was put in place in order to
And in the June 24th board minutes, or
19
perhaps it's the June 23rd board minutes -- it's the
20
24th board minutes.
21
he's the general counsel to the company, explained
22
that Baker Botts, who was the management team, had
23
their own counsel for the negotiation of the
24
management contracts, and Mr. Comstock intentionally
That's explained.
CHANCERY COURT REPORTERS
Mr. Moore,
99
1
delayed the delivery of negotiation of such draft
2
agreements until final purchase price negotiations
3
were completed with Navy.
4
So the board approves this transaction
5
on June 24th.
6
employment agreements -- there's also a draft
7
integration agreement -- were sent over to Nabors.
8
Because the companies want to announce the transaction
9
the next day, there's not enough time to get the
10
The employment agreements, draft
deal -- to get those contracts negotiated.
11
Now, it turns out, as you can look in
12
the time line, these management contracts actually
13
aren't finally executed until late September, 2014.
14
Okay.
15
entry far right.
16
just before the proxy, preliminary proxy was filed is
17
when the management contracts were executed.
18
On the very far -- to the right, it's the last
Late September.
It was actually
Because they could not get them
19
finalized prior to the announcement -- remember, the
20
board has already approved the transaction under the
21
merger agreement.
22
and there's negotiation back and forth about how much
23
assurance Nabors is going to give.
24
There is going to be a side letter,
And what the plaintiffs say in their
CHANCERY COURT REPORTERS
100
1
brief is, well, Mr. Comstock threatened to hold up the
2
deal because he was dissatisfied with the level of
3
assurance that Nabors was willing to provide.
4
wanted to provide an email that said "We'll negotiate
5
employment agreements that conform to the ones
6
attached."
7
Nabors
Mr. Comstock wanted an agreement.
He
8
wanted something in writing more than an email.
9
the plaintiffs say, well, he held up the deal for his
10
own benefit.
11
square with the facts.
12
been approved on June 24th.
13
agreement changes after June 24th.
14
already approved it.
And
That's just not -- that doesn't even
15
Remember, the deal has already
Nothing in the merger
The board has
Second of all, he told the board.
16
told the board this is what's going on.
17
Z of the binder.
18
He
That's in Tab
June 25th at 3:02 to the board.
"It appears I spoke too soon.
Still a
19
few open items so close will not occur just after the
20
bell.
21
discuss.
22
gamesmanship/negotiating," which is I think all it
23
ended up being.
24
Mr. Petrello, "he's in agreement on management
If not resolved by morning, we will call you to
At the moment we believe last minute
"In short he is saying," he being
CHANCERY COURT REPORTERS
101
1
contracts, as drafted after his multiple changes
2
yesterday through today, however in the past 30
3
minutes he has had his counsel tell our counsel that
4
he will only give an agreement via email."
5
He concludes by saying management is
6
simply not willing to take that risk based on email.
7
"This transaction is only valuable to C&J shareholders
8
to the extent the current management team remains in
9
place."
10
That is exactly what Miss Ma testified
11
to, exactly what Mr. Stewart testified to.
12
no doubt about that statement.
13
about it.
14
he follows up and says, "We're done.
15
releasing," and the board says, "Just read.
16
impressive.
17
There is
And the board knows
He sends it to the entire board, and then
We're
Very
Nice job."
The board knew everything that was
18
going on.
19
process.
20
As Miss Ma said, he didn't have to keep his board
21
informed all along the way.
22
board informed all along the way.
23
24
He wasn't going out there manipulating the
He wasn't getting out in front of his board.
He chose to keep his
You can't take her testimony, the time
line and the documents that have been reflected on
CHANCERY COURT REPORTERS
102
1
this time line and in this binder and come to any
2
other conclusion that this was an extremely well
3
informed board.
4
Now, this idea of a market check.
5
Something that I want to go back to, earlier the Court
6
asked me about, well, maybe they're really asking for
7
an injunction that you go shop the company.
8
that would be a mandatory injunction, which would
9
require summary judgment like, or maybe summary
I think
10
judgment standard level of proof in order to gain, and
11
I don't think we're anywhere near that ballpark.
12
So on this idea of a market check,
13
this Court has recognized in Plains and Pennaco as
14
well that when you do have this single-bidder kind of
15
strategy, the board -- it puts pressure on the board
16
and its knowledge and its involvement of the market.
17
The Court remarked earlier that it's a
18
small playing field, there's not that many people
19
involved.
20
in her deposition.
21
players, Halliburton and Baker Hughes, either one of
22
those, a deal like this size for companies of either
23
of those size, is not a problem.
24
Halliburton had its eyes on and Baker Hughes had its
Well, that's exactly what Director Ma said
As we know, two of the biggest
We now know what
CHANCERY COURT REPORTERS
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1
eyes on.
It wasn't C&J.
2
acquire Baker Hughes.
3
Halliburton wanted to
So there is a lot of testimony in this
4
case that the board, two of whom are private equity,
5
know the market very, very well.
6
knows the market very, very well too.
7
that there's some affirmative right to go do a
8
pre-signing market check is just not the law in
9
Delaware.
10
And Mr. Comstock
So the idea
And particularly where, as here, as
11
the Court found in Plains, the board has preserved the
12
right to do a post-signing check through -- even
13
though there's deal protection mechanisms, none of
14
them are owners.
15
favorable than the deal protection mechanisms in
16
Plains because, although I can't tell from the
17
opinion, I didn't go back and pull the merger
18
agreement, here, of course, it's the superior proposal
19
that can be for less than all of the company which
20
kind of tracks more of what this transaction looks
21
like than in Plains.
22
In fact, they're slightly more
THE COURT:
Plains I think approaches
23
the limit where the board does nothing to solicit
24
input from the market, from other potential acquirers.
CHANCERY COURT REPORTERS
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1
The single-bidder strategy works, and I don't find the
2
cases particularly satisfying, but that's where we
3
are, and I accept that.
4
OPENLANE.
5
You see the same thing in
But it depends upon a very special
6
board.
If you go back to Plains, seven out of the
7
eight directors, I think I have my arithmetic right,
8
had absolutely no noise around them.
9
a majority of the board that has noise.
Here, you've got
I'm not
10
saying it's disqualifying, but it's noise about the
11
fact that they're going to get to be directors, and
12
not only that, they're going to be the majority
13
directors in the new entity.
14
You had, in Plains, a tremendous,
15
40 percent plus or minus, premium to market before the
16
deal was announced.
17
the premium was, but your folks are struggling to get
18
us to ten to 20 percent, certainly nothing approaching
19
40 percent.
20
Here, we've got debate about what
Now we talk about this impeccable
21
knowledge.
I'm not quite sure what that means.
22
kind of like rifle precision in 220 requests.
23
not disputing that the board here is a good board, and
24
if I were going for a model of a buying board, I'm not
CHANCERY COURT REPORTERS
It's
But I'm
105
1
sure how you could do it much better, but they're a
2
selling board in my world.
3
was they didn't factor in the fact that there were
4
other options out there.
5
And what they didn't do
They just said, "We're not going to go
6
any further."
7
knowledge of their own enterprise, but did they really
8
know the Nabors assets they were getting.
9
And they may have had wonderful
I understand it's the same kind of
10
equipment that C&J uses, and they're going to
11
basically try to run C&J's business the same way.
12
I don't know that I can reach the impeccable knowledge
13
of the other side of the coin.
14
cash.
15
we know what cash is.
16
that folks knew what the Nabors' assets were worth.
But
In Plains, it was
For better or for worse, we're going to assume
17
I don't know that we can assume
MR. HOLMES:
That's -- one of the
18
reasons is we have a preliminary record.
19
three board members of seven board members that have
20
been deposed, and I don't know how you would
21
demonstrate with those other four at this point.
22
We have had
I have no doubt that when the record
23
is fully developed, that's exactly what it's going to
24
reflect.
It's going to reflect -- and as I said
CHANCERY COURT REPORTERS
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1
earlier, I'm loathe to give the Court extra reading,
2
but Director Ma's testimony -- despite my briefs in
3
this case which probably tested the limit, I am loathe
4
to do that.
5
there's several questions embedded that I want to try
6
to address all.
7
But if you look at did they do anything,
THE COURT:
8
questions, and I apologize.
9
focused.
10
11
12
13
MR. HOLMES:
That was a litany of
They certainly were not
Page 18 of Miss Ma's
deposition.
"Question:
Did the board ever ask
Citi or Tudor to look for bidders for C&J?"
14
And she goes and answers that, look,
15
we talked to them on page 18, 20, 21, 22, 23 and 24.
16
She goes into they had discussions about who might
17
else possibly be interested, who might be potential
18
interlopers if the deal were announced.
19
banks advised them, it was a very, very low percentage
20
that anyone would be interested.
21
And what the
Remember, C&J stock is -- you can look
22
at the stock price.
It was trading at a fantastic
23
multiple at the time; usually not the stuff where you
24
see that happening.
So there is some basis to hang it
CHANCERY COURT REPORTERS
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1
on.
2
Second of all, as is frequently set
3
forth -- it was one of the things in OPENLANE that I
4
think the Court remarked upon on doing a limited, very
5
quiet market check -- remember, it could have been
6
Answers.
I apologize.
7
I confuse those.
But in other cases on the
8
single-bidder strategy is she says, "Look, secondly,
9
hanging a for sale sign to the company when we are
10
contemplating this transaction is highly, highly
11
disruptive to the focus to the execution of the
12
company.
13
value."
We would not want to jeopardize C&J's
14
That's a consideration that board
15
members repeatedly use, and reasonably so, in trying
16
to decide how to fashion a process in a single-bidder
17
world, and it's something that this Court has
18
recognized in a variety of opinions about that being a
19
reasonable concern of a board member, a reasonable
20
concern of a board member.
21
In terms of -- there's debate about
22
the premium.
I definitely hear legal argument being
23
made about the debate.
24
argument that withstands even the slightest scrutiny
I have seen no financial
CHANCERY COURT REPORTERS
108
1
from the plaintiffs that would contradict the TPH, the
2
Citi or Mr. Beaulne, our expert, who did his own
3
independent valuation and calculated a 26 percent
4
multiple.
5
They had some critique about his beta.
6
That testimony was essentially like, okay, well, if
7
you take two times one and do two times two, is the
8
output twice as great.
9
never said that was the right beta.
10
11
And his answer was yes.
He
He never agreed
with that.
His independent valuation, the only
12
independent valuation that's been done in this case,
13
their expert could have done one and didn't, and
14
Delaware case law is clear that there's an inference
15
you can draw from that.
16
So his is 26 percent.
So I don't think there's any credible
17
evidence to challenge the premium that C&J
18
stockholders are receiving in this deal.
19
But, look, something else Your
20
Honor -- first of all, before I get to this point
21
about stockholder democracy which you raised, and I'll
22
get back to, the noise around the directors, the one
23
thing factually is the directors who were going to
24
serve on the board or not serve on the board wasn't
CHANCERY COURT REPORTERS
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1
known by anybody until much later.
2
There's no evidence in the record --
3
they don't say, well, they knew in April or they knew
4
in May it was these four so these four are going to do
5
it.
6
they were even told at closing.
7
didn't talk about it.
8
members were going to be."
I think the record is it wasn't -- I'm not sure
9
Director Ma said, "We
We didn't talk about who those
So this noise about continuing,
10
again -- I understand that the continuation -- you
11
know, maybe that is some noise, though there is very,
12
very little, other than just this continuation of
13
people you don't even know who is -- they don't even
14
know who it's going to be.
15
All right.
As Your Honor held in TriQuint, in
16
most circumstances, Delaware law routinely rejects the
17
notion that a director's interest in maintaining his
18
office, by itself, is a debilitating factor.
19
to have some allegations about materiality.
20
don't have any of those.
21
was going to be.
22
You got
They
Again, we didn't know who it
Now, let's go to stockholder
23
democracy.
Again, I've heard today these assertions
24
that there are misrepresentations in the proxy
CHANCERY COURT REPORTERS
110
1
statement that I've never heard of before.
One of the
2
things that counsel said was, "Well, it was in our
3
complaint."
4
I found that very curious because, as
5
the Court will recall, the complaint was filed before
6
the proxy statement was filed.
7
says at paragraph 82 is, suredly defendants won't give
8
adequate disclosure to the stockholders.
9
never amended that complaint.
What their complaint
They have
Never once amended that
10
complaint to say now the proxy has come out and here's
11
what we think is wrong with it.
12
motion.
13
reply.
It's not in their
It's not in their prayer.
It's not in their
It's waived.
14
They can't come up here -- it's
15
telling to me they've come up here today and said,
16
okay, now we have disclosure violations about the
17
strength of their motion.
18
democracy, they're sitting here saying there's a full
19
and fair summary of the financial opinion.
20
price is known to everybody.
21
and see what the deal is.
22
million times -- maybe not a million.
23
statement.
24
So in terms of stockholder
The stock
You can read the proxy
You can see it said a
I admit to that.
That's on over
I apologize.
It said numerous times that Nabors is
CHANCERY COURT REPORTERS
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1
going to end up owning 53 percent, and it sets forth
2
what we think the control limiting mechanisms are.
3
So without a pled -- actual pled
4
disclosure claim not seeking an injunction based on a
5
disclosure, and they say this is such a bad deal, such
6
a bad deal.
7
petard.
8
should get their say; do they want to double the size
9
of the company under these terms or conditions or do
10
Well, they're somewhat hung by their own
If it's such a bad deal, the stockholders
they not.
11
We know General Atlantic has got no
12
dog in this hunt.
13
director.
14
General Atlantic is a shareholder, a stray
15
stockholder.
16
It's bought more.
17
Miss Ma is not a continuing
There's no noise around her continuing.
That's it.
It's its only interest.
It wants the transaction to close.
But if they're right, it's reminiscent
18
of what Vice Chancellor Parsons recently said in the
19
Crimson case which is "Plaintiffs fail to allege that
20
a higher price reasonably was available or that there
21
was another bidder ready and willing to buy Crimson.
22
These failures are conspicuous because if, as
23
plaintiffs allege, the board approved a sale of the
24
company for somewhere between one-tenth and one-sixth
CHANCERY COURT REPORTERS
112
1
of its value, one might think some other buyer would
2
emerge to capture the surplus."
3
That's not only true about another
4
bidder emerging when you have deal protections that
5
are down the middle of the fairway.
6
stockholder democracy as well.
7
THE COURT:
It's true about
I am told that the world
8
doesn't realize that for my purposes C&J could be
9
viewed as a seller, and hence folks don't know to come
10
to make a better offer.
11
MR. HOLMES:
I find that hard to
12
believe when you read the proxy statement.
13
it's -- one of the things that this Court says in
14
looking at deal protections and whether there's an
15
alternate bidder, and Your Honor has used this
16
language, it wouldn't dissuade a sophisticated,
17
serious bidder from lobbing in a topping offer if that
18
was the case.
19
I think
I find it very hard to believe that
20
the other companies in this space who would have the
21
capability, take a Halliburton or Baker Hughes -- it
22
strains credulity to think that they don't realize
23
what this transaction is and what the price implied by
24
it is.
CHANCERY COURT REPORTERS
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1
If they want to lob in a topping bid
2
and they say, hey, you know, we'd like to buy
3
53 percent of C&J, let's put in a price, there's a
4
number of metrics one could pick in the proxy to say,
5
well, you know, the 40-day view I think was $30.76,
6
let's up that a little bit, or let's take some other
7
metric and up that.
8
9
The fact is nobody did despite deal
protections that, at worst, are down the middle of the
10
fairway.
Nobody did.
11
say, surely somebody would have.
12
So if it was as bad as they
Unless the Court has any other
13
questions, I think that wraps up my comments.
14
Mr. stone might have a few comments.
15
16
THE COURT:
I was going to turn the
podium over to Mr. Stone.
17
MR. HOLMES:
18
MR. STONE:
Your Honor, good
20
THE COURT:
Good afternoon.
21
MR. STONE:
I will be quite brief.
22
Your Honor, the plaintiff didn't say
19
Thank you very much.
afternoon.
23
anything about aiding and abetting at all in their
24
opening brief.
We noted that conspicuous absence of
CHANCERY COURT REPORTERS
114
1
2
any argument in our answering brief.
In their reply brief, they came back
3
with a footnote, a mere footnote that said "we have
4
more than enough evidence for knowing participation,"
5
but they didn't really cite any at all.
6
cited the "stretch" email that has been the subject of
7
discussion today.
8
9
They simply
So I was quite surprised today to hear
them come up with some new arguments, and as I
10
understand it, their argument is that there was some
11
kind of song and dance that Mr. Petrello enticed Mr.
12
Comstock with employment agreements, that he backed
13
him into the 445 EBITDA number, and that Mr. Petrello
14
took his cue from the "stretch" email and this all
15
apparently establishes knowing participation, so let
16
me deal briefly with those points.
17
First, with respect to the employment
18
agreements, the only evidence of record with respect
19
to what Mr. Petrello knew is a single question that
20
was asked at his deposition, and this is page 76
21
beginning at line 20.
22
"Do you recall talking to Mr. Comstock
23
or anybody else on April 30th, 2014 about employment
24
contracts for management?
CHANCERY COURT REPORTERS
115
1
"Answer:
No.
I mean, the only
2
conversation we ever had, you know, get me the drafts
3
of what you want for employment agreements and we'll
4
support giving you new employment agreements.
5
had no detailed discussions as far as I recall about
6
any specifics about anything.
7
for them to come across."
8
9
But we
We were always waiting
In fact, they did come across after
the terms of the deal were agreed to, and I think the
10
rest of the story is consistent with what Mr. Holmes
11
described before, and I won't repeat all that.
12
there was no enticement with any employment agreements
13
here on the part of Mr. Petrello.
14
So
With respect to the backing into the
15
445 EBITDA number, the record is very clear, Your
16
Honor.
17
negotiation, Nabors came up with a very high number,
18
515 million for 2015 EBITDA.
19
"That's crazy.
20
wrong accounting."
What happened here was that, as happens in a
21
And Mr. Comstock said,
This is witch craft.
You're using the
And Mr. Petrello said, "Here's the
22
books.
Come and look at them."
23
what they did.
24
Mr. Petrello in any way endorsed.
And that's precisely
So the 445 number is not a number that
It was the product
CHANCERY COURT REPORTERS
116
1
of due diligence on the part of Mr. Comstock and his
2
team.
And there was no "backing into" that 445.
3
Finally, Your Honor, with respect to
4
taking his cue from the "stretch" email, the one that
5
says "I'm willing to stretch to 6.5," Your Honor,
6
there is no evidence that Nabors knew that Mr.
7
Comstock was stretching to 6.5.
8
nothing more than posturing on his part.
9
In fact, it was
Indeed, Mr. Petrello was never
10
questioned regarding that email at all, nor was he
11
ever questioned about his view of the correct
12
multiple.
13
have come up with a very different opinion about what
14
the correct multiple was.
15
supporting the idea that somehow Nabors either knew
16
that Mr. Comstock was trying to dupe his board into
17
buying or selling, whichever way you view it, at an
18
unfair price.
19
Had he been asked, I'm sure that he would
So there's just no evidence
Your Honor, what the record actually
20
shows is a somewhat formal, actually and vigorous
21
arm's length negotiation.
22
that.
23
24
It's really no more than
Finally, Your Honor, there's a lot of
discussion today about control and whether this is a
CHANCERY COURT REPORTERS
117
1
change in control.
2
standpoint, it doesn't feel like they're getting
3
control of anything.
4
They got five years of voting for the C&J nominees for
5
a majority of the board.
6
provisions.
7
C&J employees.
It's a five-year standstill.
There are super majority
And management is completely made up of
8
9
I can only say that from Nabors'
That's a critical part of the deal.
This is a highly strategic deal that
depends on taking this very top management team in the
10
industry and putting them in charge of the NCPS
11
assets.
12
like a very good strategic transaction which Nabors
13
and its board support.
So from the Nabors' standpoint, this feels
14
15
And unless Your Honor has any
questions, that's all I have.
16
THE COURT:
I do not.
17
MR. STONE:
Thank you, Your Honor.
18
MR. KWAWEGEN:
19
22
THE COURT:
That's fine.
Let's take
five minutes, which I predict will take ten.
(At this time a short recess was taken)
23
24
Your Honor, could I
have five minutes to organize?
20
21
Thank you.
MR. KWAWEGEN:
Your Honor, thank you
for your time.
CHANCERY COURT REPORTERS
118
1
Your Honor, Mr. Holmes started his
2
presentation with a startling admission.
3
the board was advised that this was a sale of control
4
of the company.
5
court, Your Honor, and this is the first time.
6
He said that
This is a waiver privilege in open
They have clawed back documents.
They
7
have asserted privilege over everything and now they
8
tell Your Honor, well, this was known to the board
9
that this was a sale of control.
10
fair, Your Honor.
11
clawed back documents.
That's just not
They have asserted privilege.
They
You can't do that.
12
But even if you would take it, there's
13
nothing in the documents suggesting that this is true.
14
There's no discussion in the minutes, not in the
15
documents, not in the presentations, and it doesn't
16
even help them.
17
the board was advised of, well, why didn't they
18
supervise Mr. Comstock closer?
19
run wild with this process and manipulate it?
20
Because if this was something that
Why did they let him
This is pure Mills, Your Honor, pure
21
Mills.
They did not -- the testimony is clear -- did
22
not get their own financial advisor to advise them on
23
a potential sale; did nothing to actively supervise
24
this.
CHANCERY COURT REPORTERS
119
1
Now, Mr. Holmes spent a lot of the
2
time during his presentation explaining the mindset of
3
the board.
4
expand, the NCPS assets were under utilized," and the
5
question before the board was, well, what could C&J do
6
with those assets.
7
He said things like "we were looking to
Well, those are perfectly fair
8
questions if you're just buying assets.
They're not
9
perfectly fair questions when you are selling the
10
company.
11
discussed, on page 74, as a growth strategy for C&J.
12
This is growing the business.
13
doing, trying to grow the business.
14
they were selling the business.
15
Similarly, Miss Ma testified it was always
That's what they were
They did not know
Now, on the one hand now, Mr. Holmes
16
says, well, this was known to be a sale of control,
17
but on the other hand, he says, well, no, no, the
18
control still rests with the stockholders.
19
to have it both ways.
20
He wants
And one of the exhibits that we put in
21
with our reply brief, Your Honor, is an overview.
22
It's just a chart with the various provisions from the
23
by-laws and the merger agreement, and what the effect
24
is of those provisions.
CHANCERY COURT REPORTERS
120
1
There's a prohibition, for example,
2
for Nabors to solicit or encourage the sale of Red
3
Lion.
4
does not require Nabors to pay a control premium.
5
it falls away after five years.
6
the C&J stockholders.
Well, that protects the rollover board.
It
And
It does nothing for
7
There is another -- just an example,
8
there's a prohibition on -- there's a super majority
9
requirement on Nabors sale of more than 20 percent of
10
its stock.
Okay, well, that insures that the rollover
11
board is protected from some new investor that comes
12
in.
But does it do anything for the C&J stockholders?
13
No.
Does it require to Nabors to pay a control
14
premium?
No.
15
It falls away after five years?
Yes.
The requirement that the Red Lion
16
shareholders will receive the same amount on a per
17
share basis in case of a sale of Red Lion, the
18
combined entity, to a third party.
19
to this a lot in their papers.
20
Well, they point
First of all, that is a by-law
21
provision that can be amended after five years.
22
doesn't exist any more.
23
board?
24
it do anything for the C&J stockholders?
No.
It
Does it protect the rollover
Does it do anything for them?
CHANCERY COURT REPORTERS
No.
No.
Does
121
1
Your Honor, this is not guaranteeing a
2
control premium in this transaction to the C&J
3
stockholders.
4
to insure that control rests with the rollover board;
5
not with the C&J stockholders.
6
These by-law provisions do everything
Now, we also heard a lot of talk about
7
Mr. Comstock being an expert and shrewd negotiator.
8
Well, let's look at that.
9
offer together with one of the governance requirements
So he makes a $2.75 billion
10
being dual class stock, and we know that that was
11
approved by the board.
12
Now, this dual class stock is
13
interesting, because you can imagine a world where, if
14
you would have dual class stock where the C&J
15
stockholders would actually get their own class of
16
stock, where they would elect their own directors,
17
perhaps even a majority that you could say, well, you
18
know, that's interesting, they are protected.
19
But then when the bad first quarter
20
results come out, terrible, and Nabors says no, what
21
does Mr. Comstock do?
22
$2.9 billion, and he lets go of the dual class
23
structure that was potentially protecting the C&J
24
stockholders.
He increases the bid to
CHANCERY COURT REPORTERS
122
1
He was perfectly willing to trade away
2
the interest of the stockholders for his own personal
3
interest in what he thinks is a great opportunity to
4
buy these assets.
5
6
THE COURT:
And he's willing to risk
his 10 percent ownership interest for that?
7
MR. KWAWEGEN:
Well, Your Honor, if
8
you look -- and this goes a little bit to the premium.
9
If you look at the way this deal is structured, I
10
think it is fair to say that the board and Mr.
11
Comstock believed that there is upside potential long
12
in the future for this combined entity and that they
13
believe in Mr. Comstock's ability to achieve them.
14
believe that.
15
I
The problem though is they all are
16
long-term investors.
17
He's insured that he is going to run this company for
18
five years.
19
iron-clad employment agreement that if he is being
20
fired, he gets enormous payments.
21
Mr. Comstock is not going away.
He is insured that he is going to have an
He also, of course, insures a
22
$20 million deal bonus that our stockholders don't
23
get.
24
say exists in this deal, they are all spread out long
But if you then look at the premium that they
CHANCERY COURT REPORTERS
123
1
after 2018.
2
it's all negative.
3
great deal because they plan to be there.
4
are not looking out for the C&J stockholder because
5
they get an implied value that is below the trading
6
price, that is below the implied equity value pursuant
7
to the DCF analysis of Citi and Tudor.
8
9
On day one, the first year of the merger,
And for them, that's probably a
But they
Now, the defendants say, well, you
know, "The plaintiffs didn't get Mr. Jeffers to opine
10
on the value of the company.
11
evidence."
12
analysis that Citi and Tudor did, just looking at the
13
presentation to the board, it says implied value per
14
share under this deal for C&J stockholders $30.76 a
15
share.
16
That's a negative premium.
17
that.
18
They have no expert
Your Honor, just looking at the DCF
Trading price right now, $32.50 a share.
I don't need an expert for
Then, on the stretching email, we had
19
some discussion about the stretching email.
20
again, the defendants -- Mr. Holmes said, well, it's
21
another shrewd negotiation tactic to signal to the
22
other side that you will stretch the 6.5, the
23
multiple, from six to 6.5 to get a deal done.
24
There
Well, Mr. Holmes ignores part of the
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1
email.
It actually says, "To the extent the forecast
2
comes down, I will increase the multiple."
3
are those forecasts?
4
EBITDA forecasts, that are, at least during the
5
negotiation, used to value the company.
6
And what
Those are the forecasts, the
Your Honor, if you have a situation
7
where you know that your best estimate as of June 18,
8
the Citi analysis, after due diligence, after taking
9
into account all these extra costs, after taking into
10
account the lower run rates in April and in May, you
11
say, okay, our best estimate is 408, and you know
12
what, our multiple is six.
13
not close enough to 2.9.
14
Uh-oh, six times 408 is
You then, on your own, send an email
15
to the other side and say, well, to the extent our
16
forecasts come down, we'll stretch it to 6.5 to get a
17
deal done, you are signaling to the other side where
18
you need to go.
19
The email that I showed Your Honor
20
shows that.
Immediately, Mr. Restrepo, the CFO of
21
Nabors, says 450 is the target.
22
what everybody knew because Exhibit 59 also shows that
23
internally at C&J, C&J management was also working
24
with that same 450 target.
And that is exactly
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Now, you may still say, well, okay,
2
you know, these things happen.
3
important thing.
4
clear in her testimony, she said, "Okay, I don't agree
5
with you, plaintiff's counsel.
6
what he wanted to do.
7
he could."
8
Okay.
Well, here's an
Miss Ma, in her testimony, very
He had authority to do
If he wanted to do the 2.925,
Side question, is that appropriate
9
under Mills?
I don't think so.
10
the company.
But, okay, leave that to the side.
11
says he had authority and he could just check in with
12
us whenever he wanted to.
13
Not if you're selling
2.925.
She
Okay.
But then she says this was supposed to
14
be dependent on the results in due diligence.
15
clear.
16
what happens in due diligence?
17
Honor, June 10th, Deloitte says there is a significant
18
problem.
19
downward profitability trend since 2012 because of the
20
Marathon contract.
This must be borne out in due diligence.
So
I have showed Your
NCPS is not making its earnings.
21
It's in a
Mr. Comstock says "I was aware of
22
that."
23
stop working.
24
Very
What is the response?
They tell Deloitte to
Now, Mr. Holmes said, well, you know,
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1
look at Tab R in my binder and he says, well, look,
2
there Mr. McMullen said, well, pens down, we're
3
willing to walk away from the deal.
4
He was saying that to his team?
5
not saying it to his team.
6
due diligence team at Deloitte.
7
to the internal team at C&J.
8
out of the picture.
9
He's
He's saying that to the
He's not saying that
They're taking Deloitte
So was Deloitte ever asked to finalize
10
its due diligence findings?
11
provided with the presentation from the Deloitte
12
people who were doing this due diligence?
13
The only --
14
THE COURT:
No.
Was the board ever
No.
What do I do with this?
15
What was being acquired was not the Nabors completion
16
business on a truly ongoing basis.
17
assets into which the C&J management could be
18
inserted.
19
It was a shell of
And they were so much better at
20
running that enterprise than what the Nabors
21
management was, that's where the value was going to
22
come from, and therefore, unlike most deals where you
23
buy a business, the Nabors numbers really matter.
24
this instance, the Nabors numbers -- I'm not saying
CHANCERY COURT REPORTERS
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1
they're not relevant, but they're not nearly as
2
important as what they usually are because this is all
3
about what can C&J do with those assets.
4
MR. KWAWEGEN:
So, Your Honor, I know
5
that that's what the defendants are telling you, but
6
NCPS, this division, is not an empty shell with just a
7
bunch of assets.
8
It's a running business.
9
Nabors.
10
It isn't.
There are people there.
It's a running division of
And so if you are trying to value that
11
running division, you don't just look at the assets.
12
You look at like what are the future revenue
13
potentials, what are the clients, what is going on in
14
this business.
15
If this is a publicly-traded company,
16
you say, okay, I have analysts covering this, I have
17
all this other information.
18
more opaque.
19
this.
20
EBITDA was irrelevant, that's just not true.
21
That's not how this deal was
Here, it's much, much
And so it's much more difficult to value
So for the defendants to say, well, you know,
22
negotiated by Comstack with Petrello.
23
about EBITDA from the very first offer letter to the
24
very end.
It was all about EBITDA.
It was all
It switched from
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1
2014 to 2015 to support a higher valuation.
2
that's how they valued this case.
3
away from that now to say it's not convenient.
4
how they valued this case.
5
But
They cannot walk
That's
So the bottom line is I understand
6
that that's what they want you to believe, that this
7
is a great opportunity for C&J, and maybe that's true.
8
If this was a pure acquisition process, we would not
9
be standing here.
10
But it isn't.
As part of this structuring this deal,
11
they also sold the control of C&J, and from that
12
perspective, I don't think you can compare the two.
13
don't think you can say, well, it may be a good
14
opportunity for C&J and its rollover directors and its
15
management in the future, while it's not necessarily a
16
good opportunity at all for the C&J stockholders.
17
THE COURT:
I
If Mr. Comstock negotiated
18
the best deal that he could, wouldn't that necessarily
19
include whatever the control premium was?
20
otherwise what you're telling me is there's a fair
21
value for the business and then there's something else
22
that has to be paid.
23
24
Because
I understand that intellectually, but
as a sales process, how do you get there?
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MR. KWAWEGEN:
So I think the best
2
answer I can give you is this way.
3
different mindset.
4
"I never considered selling this company."
5
Mr. Stewart said, "We would never consider selling
6
this company."
7
It's a totally
Mr. Comstock made it very clear,
It's a different mindset.
If you are, as a board or another
8
fiduciary, if you are engaged in acquiring the assets,
9
you will try to get those done at the best possible
10
price for the company if you're doing your job in good
11
faith.
12
But if you are selling control of the
13
company, a whole new set of considerations come into
14
play that you never even considered when you are
15
buying assets, including is this really the best deal
16
possible for shareholders, is there another bidder out
17
there, is there -- is the stand-alone value
18
potentially better.
19
So if you look at the numbers that are
20
presented, for example, by Citi and by Tudor to the
21
board, they have a very significant stand-alone value
22
here, 35, $37 a share at the midpoint.
23
consideration from the board, well, is this company
24
better off in the next two years buying these assets,
CHANCERY COURT REPORTERS
And there's no
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1
yes or no.
2
And there's certainly no
3
consideration -- what I mean to say by this mindset,
4
there's certainly no consideration to say, well, is
5
there something better out there because it didn't
6
even come into the equation.
7
that mindset, how can you maximize shareholder value?
8
You're not even trying.
9
And if you don't have
I guess maybe I'll try to find an
10
analogy.
If I am buying -- I am doing this somewhat
11
on the fly, I admit, but if I am buying a significant
12
painting for my house, I think, okay, I'm willing to
13
buy this painting for XYZ dollars and it will make my
14
house nicer.
15
is it accretive to my house.
The calculation would be, okay, how much
16
Now, if I am selling my only house, I
17
now need to look for another house.
18
any more.
19
more critical.
20
I approach this.
21
it's not as material as just selling the house.
22
apples and oranges.
23
I'm trying to find the best analogy.
24
I don't have it
It's a different mindset.
I will be much
I will be much more careful in the way
Even if the acquisition is material,
It's
I know this is sort of garbled.
THE COURT:
It's understandable.
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If
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1
nothing else, that time on the clock will justify
2
pretty much anything.
3
But what I'm struggling with is trying
4
to figure out, the board was not thoroughly deposed.
5
There's no requirement that you do so, but that was a
6
litigation tactic.
7
the best guidance I have at this point.
8
read it, it certainly makes more than passing
9
reference to that which sellers would do in a single-
10
Miss Ma's deposition is perhaps
And if you
buyer scenario.
11
And you can say it came in late, and I
12
understand that, but that's also, to some extent, the
13
consequence of your choice of who to depose and who
14
not to depose.
15
Miss Ma says -- and I have no real reason to doubt
16
her -- that they really were thinking about control
17
and premiums and things like that.
So I've got a record basis where
18
MR. KWAWEGEN:
So, Your Honor, I guess
19
there are a couple of points.
20
Court to say this is late.
21
record before you, get right before a deposition, and
22
then suddenly have all these revelations that are
23
nowhere in the record, that are nowhere in any
24
documents.
Yes, I would urge the
You can't have an entire
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1
If you have board minutes that start
2
with "We are buying NCPS," and then end with "We are
3
buying NCPS," then to suddenly back into a story
4
saying, "Well, we considered all options."
5
For example, Miss Ma says, "Well, we
6
asked Citi whether there would be potential buyers out
7
there."
8
opinion?
9
buyers for this company."
10
And what does Citi say in its fairness
"We were not asked to look into potential
I think you have to discredit that.
11
Miss Ma says, "Well, you know, we considered a control
12
premium," when Mr. Stewart was emphatic no one at the
13
board asked about a control premium.
14
So I think that to be fair to the
15
entire record, I don't think that Miss Ma's deposition
16
testimony holds up at all.
17
If you look at what Mr. Stewart
18
testified, "We did not talk about a control premium."
19
When you then look at what Miss Ma testified, "We
20
considered the control premium."
21
are the control premiums, what is the control premium
22
here?
23
synergies, potential cost synergies, potential tax
24
synergies, potential this.
I asked, okay, what
She comes up with synergies, potential revenue
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1
There is no discussion of an immediate
2
control premium.
3
a potential, not real, you don't know, but a potential
4
upside in a future revenue, a minority interest in a
5
potential revenue, it's not the same as saying "I'm
6
getting more for my shares today than they are being
7
traded at."
8
9
As I urged the Court before, having
It's not the same.
THE COURT:
We talk about a control
premium, but let's talk about a standard all-cash
10
deal.
$37.
11
directors say, well, you know, the business is
12
probably worth $35 and a control premium is worth $2
13
or whatever percentage you want to ascribe to it.
14
I don't recall very often seeing
Those conversations tend not to
15
happen.
The focus is on what's the best deal we can
16
get.
17
consciously or not consciously, or subconsciously,
18
doesn't make a whole lot of difference, does it?
Whether it includes a control premium,
19
MR. KWAWEGEN:
I think it does, Your
20
Honor, because -- this is where I started my very,
21
very beginning of this argument with this is not a
22
normal deal.
23
24
In a normal deal, in a cash deal, if a
board is presented with a potential sale of the
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1
company and the financial advisors say, look, the
2
implied value of this deal is $30.76 a share, and you
3
know what, it's trading right now at $32.50 a share,
4
if you are selling the company, you're going to say,
5
well, hang on a minute, are my shareholders getting
6
$30 a share and it's actually trading at 32?
7
And if those same financial advisors
8
say, you know what, if you don't sell yourself, it's
9
worth 35 to 37.
Any board in good faith would say,
10
whoa, whoa, whoa, my shareholders are getting $30 a
11
share while the implied value of the company is 37?
12
What's going on here?
13
I'm not saying that they should go
14
down to the dollars and cents and say, well -- but
15
that's not the normal case, you see.
16
you would have is to say it's trading at 32, the
17
implied value of this deal for shareholders is 50.
18
THE COURT:
The normal case
I agree this is an unusual
19
deal.
It's not one that comes by very often.
20
just because it's unusual doesn't make it bad.
But
21
You can go back to the wonderful
22
guidance that there's no specific blueprint that
23
directors have to follow.
24
position be willing to give the directors who are
So shouldn't somebody in my
CHANCERY COURT REPORTERS
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1
confronted with an unusual deal even greater latitude
2
to exercise their business judgment?
3
MR. KWAWEGEN:
4
THE COURT:
5
Your Honor --
Or to pursue getting the
maximum consideration for the shareholders.
6
MR. KWAWEGEN:
I think, Your Honor,
7
the full quote is there's no blueprint for reasonable
8
sales process or a reasonable transaction process.
9
There was no sales process.
10
no blueprint.
11
thought they were buying assets.
12
example, said, "Look, we asked Citi what potential
13
interlopers there would be," I asked did you get
14
financial advice to help you with sale side of the
15
deal.
16
evidence shows that this board was never considering
17
selling C&J.
No.
18
There is no sales process.
There is
They
So when Miss Ma, for
No, because the board, contemporaneous
Mr. Comstock, the CEO and chairman,
19
says, "I have not considered selling C&J in the last
20
12 months."
21
briefs and made clear what our theory was said, "Oh,
22
no, no, we were not selling the company.
23
out there selling the company."
24
Mr. Stewart deposed before we put in your
We were not
So if you are talking about a
CHANCERY COURT REPORTERS
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1
reasonable blueprint, the minimum you have as a
2
starting point is a board that is aware that they are
3
selling themselves.
4
why I started off the argument saying this case is
5
worse than Mills and Del Monte, because there the
6
board was aware but it was misled.
7
was not even aware and was misled.
8
9
And every single case -- that's
Here, the board
Now, Your Honor, there was some
discussion about whether or not we had adequately
10
indicated that there were some disclosure issues in
11
this case.
12
but I cannot stress it enough.
13
First, I think I made this point earlier,
Your Honor, we are not in the business
14
of fixing disclosure issues, okay.
15
Court, and we come to Your Honor because we believe
16
there is a fundamental problem with this deal, and
17
that's the basis for our injunction request.
18
We come to this
But we did raise disclosure issues on
19
page 51 of our opening brief.
20
the proxy does not disclose that Comstack repeatedly
21
changed the method for valuing NCPS to support a
22
higher valuation as NCPS continued its downward trend
23
and profitability while missing EBITDA forecasts.
24
We say, for example,
There are four bullet points.
CHANCERY COURT REPORTERS
I won't
137
1
read them all to Your Honor.
2
it also talks about the "stretch" email that was never
3
disclosed to the board.
4
Comstock's threat to walk away from the deal if he did
5
not get his employment agreement.
6
You can see that.
But
It talks also about Mr.
On that point, Mr. Holmes said, "Oh,
7
that was all disclosed to the board, there was no real
8
threat to walk away."
9
Exhibit 68 that we put in, this is what Mr. Comstock
Your Honor, if you look at
10
says on June 25th after the board has approved the
11
deal.
12
currently stands.
13
so closing then is out of the question.
14
resolved in the next hour or so it will be next week
15
unless my board intervenes and approves without
16
management support."
17
"We will not be prepared to close as it
Also, I am out tomorrow and Friday,
Unless
We know that that was never going to
18
happen, Your Honor.
19
threatening to blow up the deal unless he gets his
20
employment agreement in writing.
21
So, yes, Mr. Comstock is
Now, in the briefs, the defendant
22
said, oh, you know, but look at that side agreement,
23
that doesn't say anything.
24
say is that one of the referenced exhibits, Exhibit A,
But what they forgot to
CHANCERY COURT REPORTERS
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1
is Mr. Comstock's employment agreement, and it has a
2
$19.1 million deal signing bonus, including 500,000
3
restricted stock units that Goldman had calculated,
4
altogether being 19.1 million.
5
It does include the severance
6
protections we talked about earlier.
7
Comstock is threatening to blow up this deal unless he
8
gets what he wants.
9
So, yes, Mr.
Now, just one important side note for
10
Miss Ma.
Miss Ma in her testimony said, "Well, you
11
know, there was a problem with the weather, that's why
12
NCPS was not meeting its forecasts."
13
Well, we know that Deloitte had said
14
no, it's not the weather.
It's not the weather.
15
Marathon.
16
it's Marathon.
17
never presented to the board by Deloitte, Miss Ma
18
didn't even know this.
It's
Mr. Comstock said it's not the weather,
But because Deloitte's results were
It doesn't matter how.
19
Two final points, Your Honor.
Three.
20
Mr. Holmes just said, well, General
21
Atlantic wants this deal to close because they bought
22
some more shares.
23
Honor.
24
that this was because it was a good deal price now,
That's nowhere in the record, Your
They bought some shares, but Miss Ma testified
CHANCERY COURT REPORTERS
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1
because the stock price of both C&J and Nabors has
2
gone down.
3
Atlantic is wanting this deal to close.
4
There's no testimony anywhere that General
Mr. Holmes also speculates that there
5
was no other bidder but -- and this is a fundamental
6
point in our brief.
7
have the right, to have a board make that
8
determination, a board that is actually considering
9
selling the company, not Mr. Holmes or me or another
We have the right, shareholders
10
lawyer.
11
believe this is ripe for an injunction.
12
This is a board decision.
That's why we
Last point, and that's just to respond
13
to Mr. Stone's comment that there is no real aiding
14
and abetting here.
15
discussion about specifics with respect to Mr.
16
Comstock's employment agreement until later.
17
First, he said there was no
The truth is if you promise the CEO
18
that you will be aggressive in your employment
19
agreements that you're going to push, you don't need
20
much more specifics than that.
21
be good.
22
look, to the extent your forecasts, which it's not a
23
publicly traded company, your internal forecasts come
24
down, I will stretch the multiple, and then you both
You know it's going to
And then if you then get an email saying,
CHANCERY COURT REPORTERS
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1
work towards a $450 million target, that, Your Honor,
2
is conscious, and that, Your Honor, is aiding and
3
abetting Mr. Comstock getting a deal that he wants to
4
push through.
5
The final point on that is I believe I
6
heard Mr. Stone say that there was no evidence that
7
Nabors knew there was a $450 million target.
8
Your Honor the document where Mr. Restrepo immediately
9
responds to the email being forwarded, the "stretch"
I showed
10
email being forwarded saying the $450 million target.
11
I think that shows enough.
12
13
Your Honor, unless you have any
further questions.
14
THE COURT:
15
MR. KWAWEGEN:
16
Thank you.
Thank you, Your Honor,
for your time.
17
THE COURT:
18
MR. HOLMES:
19
I do not.
Mr. Holmes.
I will keep it extremely
brief.
20
THE COURT:
I have made that threat
21
before and totally failed to live up to it.
22
MR. HOLMES:
23
24
We'll see.
I'll dig a
bigger hole.
Number one, the notion that the board
CHANCERY COURT REPORTERS
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1
was getting $30.76 a share is completely eviscerated
2
by the Tudor Pickering analysis which says, on page
3
16, this is the June 24 analysis, that the midpoint --
4
the range is 28.84 to 47.08 and the middle is 37.56
5
for the DCF analysis of the combined company.
6
that's higher than the DCF analysis of the stand-alone
7
company.
So
8
Two, Miss Ma, this notion that she
9
somehow influenced her testimony based on the fact
10
that the briefs had been put in.
11
counsel asked her that.
12
asked after her testimony, she said "I haven't read
13
the briefs."
14
The funny thing is
The very last question he
Three, he says there are disclosures
15
in the complaint.
16
irreparable injury.
17
probable success on the merits based on disclosures.
18
It's in the context of is there
Never once is there do they have
So, four, the Deloitte report.
19
Stewart testifies, page 72, he received the Deloitte
20
Touche report.
21
Four, General Atlantic, there being no
22
evidence in the record that General Atlantic supports
23
this transaction.
24
of Miss Ma's affidavit.
The first sentence, paragraph ten
"General Atlantic, which is a
CHANCERY COURT REPORTERS
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1
significant stockholder in C&J likewise believes that
2
the proposed transaction is in the best interests of
3
C&J."
4
That's all, Your Honor.
5
THE COURT:
Mr. Stone.
6
MR. STONE:
Nothing for me, Your
THE COURT:
It is late, and that ought
7
8
9
Honor.
to guide me to stand down, but I think this is a case
10
where a prompt answer will allow those who are unhappy
11
with it to seek an appeal.
12
because I think the issues here are very close.
13
are very interesting issues.
14
I will certify an appeal
They
I start with the disclosure claims.
15
They simply were not fairly presented in the
16
plaintiff's briefing to support the application for
17
summary judgment.
18
of what I think is a fairly complicated preliminary
19
injunction hearing at the last minute with the briefs
20
being as they are.
21
we sit here today, have been waived.
22
I am not about to expand the scope
The disclosure claims, at least as
Plaintiff, a stockholder of C&J Energy
23
Services, brings a class action on behalf of itself
24
and C&J's other public stockholders seeking to enjoin
CHANCERY COURT REPORTERS
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1
a stockholder vote on a merger agreement for a period
2
of time to allow C&J's board to explore alternative
3
transactions.
4
The challenged merger was announced on
5
June 25th of this year and would involve C&J's merging
6
with Nabors Red Lion Limited, a subsidiary of Nabors
7
Industries Limited.
8
of C&J common stock converted into the right to
9
receive one common share of Red Lion.
The merger would see each share
Upon
10
consummation, C&J's shareholders will have a
11
47 percent interest in Red Lion.
12
and production business in the United States and
13
Canada will be transferred to the surviving entity
14
which will be led by C&J's management.
15
Nabors' completion
Four of C&J's current board members
16
will comprise a majority of the board of the new
17
entity, and they will have guaranteed five-year terms.
18
I do note that at the time the merger was agreed to,
19
the identity of the four directors, at least the
20
non-management directors, had not been determined.
21
Nabors emerged as a potential partner
22
for a combination with C&J when Citigroup approached
23
the company's CEOs, Mr. Comstock for C&J and
24
Mr. Petrello for Nabors, with the idea of combining
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144
1
C&J and Nabors completion and production services
2
division.
3
company and had been looking to grow through strategic
4
acquisitions.
5
At that time, C&J was a successful growing
Mr. Comstock and Mr. Petrello
6
negotiated a transaction during early 2014.
7
Apparently, the two agreed that Nabors would receive a
8
majority stake in Red Lion in order to achieve
9
significant tax savings resulting from the tax
10
inversion, which is associated with the location or
11
registration of the new entity in Bermuda.
12
It was clear throughout the
13
negotiations that Mr. Comstock and his management team
14
would manage Red Lion.
15
could turn around Nabors completion and production
16
services division which he considered to be poorly
17
run.
18
Mr. Comstock believed that he
C&J's management began to address
19
valuation in March.
At this point, Nabors represented
20
that its completion and production services division
21
would have an EBITDA of perhaps 463 million in 2014
22
and 489 million in 2015.
23
over time, and Mr. Comstock did grow increasingly
24
concerned about the division's performance.
The projections declined
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145
1
I note that C&J's position is that it
2
was looking at what it could do with Nabors business,
3
not what Nabors had been doing with its business.
4
C&J's board deferred to Mr. Comstock
5
to negotiate the terms of the merger.
On April 4, Mr.
6
Comstock proposed a deal which implied a $2.6 billion
7
value.
8
offer to 2.75 billion.
9
increasing, the completion and production services
By April 14, Mr. Comstock had increased C&J's
Although the offers were
10
division had a poor first quarter financial
11
performance.
12
Despite the dismal performance,
13
Mr. Petrello made clear that he wanted C&J to pay 2.9
14
billion or so.
15
that they would receive very generous employment
16
packages as a result of the merger, although those
17
agreements were not negotiated until a couple of
18
months after the merger agreement was signed.
19
He also made clear to C&J's management
Mr. Comstock further increased his
20
offer in late April despite the continuing problems
21
with achieving the forecasted EBITDA.
22
mutually satisfactory purchase price, Mr. Comstock
23
decided to change the approach used to value the
24
division.
To reach a
He and Mr. Petrello agreed to a valuation
CHANCERY COURT REPORTERS
146
1
in principle of 2.9 billion on April 30.
2
With the declining performance in the
3
completion and production services division, it became
4
clear that the 2014 EBITDA would not support that
5
valuation.
6
use 2015 EBITDA.
7
turned to Citi, who was advising C&J on the sale side,
8
to provide financing for the merger, and when I say
9
"on the sale side," I probably should say "on the deal
The financial projections were revised to
By late May, C&J's management had
10
side" because it is not my intent to put a rabbit in
11
the hat here.
12
interest, C&J retained a second financial advisor to
13
provide a fairness opinion.
Because of the resulting conflict in
14
In June, Deloitte reported on its due
15
diligence assessment on the completion and production
16
services division.
17
decline.
18
results continued a downward trend in profitability
19
which was a concern for the deal value.
20
The results had continued to
Deloitte concluded that the low April 2014
Mr. Comstock apparently questioned the
21
credibility of Nabors' accounting.
Exactly the scope
22
of that skepticism is not totally clear.
23
these concerns, Mr. Comstock did use some arguably
24
optimistic values and did increase the multiple for
CHANCERY COURT REPORTERS
Despite
147
1
EBITDA to get to a number that would support the
2
transaction.
3
C&J's board approved the merger of C&J
4
and Red Lion on June 24.
Nabors will receive
5
53 percent of Red Lion's outstanding shares but has
6
agreed to governance provisions limiting its exercise
7
of control for five years.
8
transaction, the board did not consider alternative
9
transactions.
In approving the
The board did not seek out other
10
potential buyers.
11
process was more akin to what one would expect from a
12
board pursuing an acquisition rather than one selling
13
a company, but that is not necessarily fatal to the
14
arguments that C&J makes.
15
The board's review of the merger
The plaintiff challenges the
16
transaction based on what it claims to have been a
17
defective sales process.
18
preliminary injunction, the plaintiff must demonstrate
19
a reasonable probability of success on the merits, the
20
threat of imminent irreparable harm, and that a
21
balancing of the equities favors injunctive relief.
22
The defendants invoked this Court's
23
decision of last year in Plains as the template for
24
the deal which they structured.
In order to earn a
There are many
CHANCERY COURT REPORTERS
148
1
similarities, and those similarities are related to
2
why Plains, where the parties did agree that Revlon
3
applied, approached the line for what may be
4
considered an adequate sales process, in a
5
single-buyer effort.
6
The similarities include that the
7
seller's CEO was the lead negotiator and would have a
8
significant position in the post-merger entity.
9
this instance, the role of Mr. Comstock, C&J's CEO, is
10
In
even more impressive.
11
Like here, the board in Plains did not
12
shop the company or have a pre-agreement market check
13
or a go-shop provision.
14
committee.
15
lacked important information.
16
however, were modest, and in the five months after the
17
deal was announced, no intervening offers surfaced,
18
and that is exactly what has happened here.
19
months, no intervening offers have surfaced.
20
There was no special
There were suggestions that the board
The deal protections
In five
This case does differ in certain ways
21
from Plains.
First, Plains was sold at approximately
22
a 40 percent premium to the premerger announcement
23
price.
24
around 20 percent, but there is some disagreement as
Here, there may be a modest premium, perhaps
CHANCERY COURT REPORTERS
149
1
to the extent of the deal premium.
2
Second, and this is the major problem
3
that I have encountered with this case, it is not so
4
clear that the board approached this transaction as a
5
sale.
6
100 percent of C&J now, will end up only owning
7
47 percent of the new entity.
8
no longer will have collective control.
9
always a sale situation, and the board understood it
10
C&J's shareholders, who, of course, own
Thus, they technically
Plains was
as such, and acted with that in mind.
11
The C&J board did not approach this
12
transaction as part of a sales effort.
13
go back to documents from very early on in the
14
process, there is talk about the board unanimously
15
approved the company's acquisition of Navy which was
16
the name for the Nabors completion and production
17
business.
18
Indeed, if we
Here, the post-merger minority status
19
may have been driven by tax considerations.
As noted,
20
the new entity will be registered in Bermuda.
21
the tax law may suggest one course of conduct does not
22
justify overlooking or minimizing basic corporate
23
governance responsibilities.
24
affidavit sets forth, the board did consider control
That
Yet, as Miss Ma's
CHANCERY COURT REPORTERS
150
1
premiums and a wide range of options that might well
2
have involved a more detailed assessment of what one
3
would expect from a board that is in the selling
4
process as opposed to the buying process.
5
Third, as I have noted, C&J's board
6
took no steps to sell or shop the company otherwise.
7
In order to justify not shopping the company or
8
engaging in other techniques available to sellers, it
9
is generally viewed as imperative that the board have
10
impeccable knowledge of the value of the company that
11
it is selling.
12
I have no doubt about the board's
13
knowledge as to the value of C&J, but it is uncertain
14
what its knowledge was with respect to the Nabors
15
assets.
16
not so important here because it's what would C&J's
17
management do with those assets.
18
value was going to come from.
19
cannot sit here and say that that is impeccable
20
knowledge within the Plains notion.
21
Of course, the value of the Nabors assets is
That is where the
But, unfortunately, I
There were questions, some raised by
22
Deloitte, about Nabors' accounting methods and the
23
track that the EBITDA was following.
24
transaction such as Plains, the value of the acquiring
CHANCERY COURT REPORTERS
In a cash
151
1
company, assuming it can pay the merger price, is not
2
that critical.
3
are trading their C&J stock for shares in a new entity
4
owning substantial former assets of Nabors, and there
5
simply is not the confidence in the valuation of those
6
assets to justify the discretion that must be accorded
7
boards if it followed the general strategy of Plains.
Here, however, the C&J shareholders
8
Fourth, another concern that should be
9
touched upon is the independence and disinterestedness
10
of the board.
11
were, beyond any question, independent and
12
disinterested.
13
have motivated them.
14
have been called into question.
15
the C&J board, a majority, are guaranteed seats on the
16
new entity's board with guaranteed terms of five
17
years.
18
In Plains, seven out of eight directors
There was no question about what may
Only the status of the CEO could
Here, four members of
They will also be a majority of the new board.
I am not as concerned about the
19
conflict aspect of this as perhaps some would argue
20
simply because continuing on with a board is not, in
21
and of itself, disqualifying.
22
is a unique status and it raises concern.
23
certainly does not call into question the independence
24
of the board or the disinterestedness of the board,
The five-year guarantee
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But it
152
1
especially since who was going to serve on the new
2
board was not fully determined at the time the merger
3
agreement was entered into.
4
factor that goes into determining whether or not the
5
Plains strategy worked.
6
Nonetheless, it is a
I am satisfied that there is a
7
plausible showing of a likelihood of success on the
8
merits as to a breach of the duty of care, and that
9
goes to the absence of an effort to sell.
This
10
company was looking at this pretty much as a buyer
11
would, and there simply was not the engagement that
12
one would expect from a board in the sales process.
13
The Court is not suggesting any
14
specific steps that the board needed to take, but the
15
fundamental underpinning -- and lacking here -- is a
16
recognition of the sales process that this transaction
17
involved.
18
It is a very close call, and as I
19
indicated, I will certify this if anyone wants to take
20
an appeal.
21
whether there was irreparable injury.
22
record will evolve, but as of now, it certainly looks
23
as if the board was not conflicted, and, therefore, it
24
is likely that any due care claim for monetary damages
That brings me then to the question of
CHANCERY COURT REPORTERS
Perhaps the
153
1
would be exculpated by the Section 102(b)(7)
2
provision.
3
I do not see on this record any basis
4
for loyalty claims, although as the record is
5
developed, that conclusion, obviously tentative now,
6
could readily change.
7
I pause because it has been five
8
months since the deal was announced and no one has
9
come forward.
The number of entities that would be
10
interested in acquiring C&J is small, and it is
11
impossible to believe that they do not know about the
12
transaction.
13
protection measures, one does wonder why, if the deal
14
is as bad as the Plaintiff contends, no one has put
15
forth another offer.
16
another buyer will emerge.
17
Given the relatively modest deal
It is easy to be skeptical that
The shareholders are adequately
18
informed, and one can ask why they should not be
19
allowed to decide.
20
particularly satisfying one, is simply that they are
21
entitled to having a sales process run when their
22
company is being sold, and I don't believe that there
23
was a sales process as that concept is commonly
24
understood.
The answer, which is not a
CHANCERY COURT REPORTERS
154
1
As for balancing of the equities, I
2
have touched on much of what should be considered
3
already, but this is a transaction where it is likely
4
that the board did not exercise due care in its sales
5
methodology mainly because it wasn't focused on a
6
sales process.
7
plaintiff has prevailed on its request for a
8
preliminary injunction.
9
scope.
10
That is why I believe that the
The question is what is the
I am prepared to enjoin the merger for
11
a period of 30 days from today during which time the
12
company, and it does have directors who can do this,
13
shall solicit interest.
14
modification of the deal protection provisions.
15
nothing develops either in terms of potential buyer or
16
in terms of an additional factual basis for further
17
injunctive relief, the injunction will expire after
18
the 30-day period.
19
This is a relatively modest
If
I look to Del Monte for some guidance,
20
but I have extended the period there of 20 days to 30
21
days here, in part because I am concerned that 20 days
22
may not be a sufficient period, and because the
23
impending holiday season seems to make everything take
24
longer than what it otherwise would.
CHANCERY COURT REPORTERS
155
1
I have no sense that this deal was
2
otherwise going to go away.
3
always a risk, but that is just the nature of
4
enjoining a transaction.
5
indicated, not a permanent injunction.
6
very brief respite.
7
If I am wrong, that's
This is, as I have
It is for a
Bond must be set for a preliminary
8
injunction.
Defendants have suggested that the deal
9
value is the appropriate metric.
If they are correct
10
on that, I doubt that we're going to see very many
11
deals enjoined.
12
reasonably established by looking at the termination
13
fee.
14
it is a reference.
15
makes sense.
16
of Del Monte.
17
termination fee is 65 million.
18
A more modest amount can be
It is not likely to come into play, but at least
One percent of the termination fee
It follows, to an extent, the approach
Bond will be set at $650,000.
As I have indicated, there are several
19
interesting questions here.
20
certify an appeal.
21
The
I am perfectly willing to
As for a form of order, my impression
22
is that it would be better if counsel were first to
23
confer about the form of the implementing order.
24
must prepare one, please let me know.
CHANCERY COURT REPORTERS
I would ask
If I
156
1
that I be told of the need for me to do so by no later
2
than close of business tomorrow.
3
I thank counsel.
The arguments were
4
outstanding, and an incredible amount of work went in
5
to getting this matter ready for argument.
6
also share that I have gone back and forth throughout
7
this day as to what I would do.
8
that reflecting on it any longer would let me get to a
9
more informed answer than what I have given you.
10
all very much for your patience.
12
know about the form of order.
13
But I am not sure
With that, it is late.
11
I will
I thank you
As I said, let me
With that, recess court please.
14
15
(The Court adjourned at 5:50 p.m.)
16
17
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18
19
20
21
22
23
24
CHANCERY COURT REPORTERS
157
CERTIFICATE
I, MAUREEN M. McCAFFERY, Official
Court Reporter of the Chancery Court, State of
Delaware, do hereby certify that the foregoing pages
numbered 3 through 156 contain a true and correct
transcription of the proceedings as stenographically
reported by me at the hearing in the above cause before
the Vice Chancellor of the State of Delaware, on the
date therein indicated.
IN WITNESS WHEREOF, I have hereunto
set my hand at Dover, this 26th day of November, 2014.
/s/Maureen M. McCaffery
--------------------------Maureen M. McCaffery
Official Court Reporter
of the Chancery Court
State of Delaware
CHANCERY COURT REPORTERS